The days of easy money may be ending, as central banks worried by high inflation are beginning to tighten their monetary policies. The US Federal Reserve announced this week it was doubling the tapering of its pandemic-era stimulus and signaled three interest rate hikes in 2022. The Bank of England went a step ahead and announced interest rate hike from 0.1 per cent to 0.25 per cent. The European Central Bank, too, has announced it will cut its bond buying programme.
As the COVID-19 pandemic struck, global central banks ushered in trillions of dollars in stimulus. With record low interest rates, investors poured into stock markets big time. But, as the easy money policy ends, so is the flow of money into the stocks.
In December, foreign portfolio investors have pulled out Rs 13,470 crore from India’s equity markets. Their total investments this year in India’s equity stand at Rs 31,308 crore, a fraction of the Rs 1.7 lakh crore they pumped in 2020.
The FII pullout, along with the recent emergence of the possibly more contagious Omicron strain of the coronavirus, is having a bearing on stocks. The BSE sensex ended down 889 points or 1.5 per cent to close at 57,011.74 level. The NSE Nifty 50 also ended 1.5 per cent lower (263 points) to 16,985.20. Over the past one month, the broader markets are down 5 per cent.
Friday’s stock market crash echoed similar sell-off in other major markets. The Hang Seng index in Hong Kong was down 1.2 per cent, the Nikkei Stock Average 225 in Tokyo declined 1.8 per cent and the Shanghai Composite Index was down 1.2 per cent. In Europe too major markets were trading either lower or flat.
“Globally markets saw a sell-off as central banks are tightening their monetary policy and uncertainties over the impact of fast spreading Omicron variant likely to hit economies. Geopolitical tensions between China and US flared again, thus adding to negative market sentiments,” said Siddhartha Khemka, head – retail research at Motilal Oswal Financial Services.
On Friday, barring the information technology index, which rose 1.3 per cent, most other sectoral indices ended in the red. On the Sensex, banking and finance stocks were among those most hammered; IndusInd Bank fell near 5 per cent, Kotak Bank was down 3.6 per cent, Bajaj Finserv and HDFC tumbled 3 per cent and SBI and Axis Bank were down over 2 per cent.
There were only 5 gainers in the 30-share Sensex – Infosys, HCL Tech, Power Grid, Sun Pharma and TCS.
Analysts feel the markets could be in for further correction as FIIs will continue to pull out, as they head into the Christmas holiday season clouded by the Omicron variant.
“The flight of funds, which had reached the shores of emerging markets, as the quantitative easing began with the outbreak of the pandemic, is gradually finding its way back to where it came from, a feature with the earlier tapering too. This trend may likely accelerate further before it could moderate,” said Joseph Thomas, head of research at Emkay Wealth Management.
Heading into 2022, all eyes will be on central bankers and the pace of liquidity normalisation adopted by them. Any third wave of COVID19 due to the new variant, domestic as well as foreign fund flows, demand trends over the next few months and inflation movement would determine the market direction, said Shibani Kurian, head of equity research at Kotak Mahindra Asset Management.
“We expect that even while the structural drivers of the Indian equity markets are intact over the medium-to-long term, in the near-term, given the current valuations, Indian equity markets could witness some degree of volatility,” said Kurian.
