India Stock Outlook: Inflation figures will steer market direction

NEW DELHI: Indian stock indices have managed to end this week with gains on a cumulative basis. Benchmark Sensex and Nifty indices accumulated 0.8-1.0 per cent gains.

Friday’s trading session, however, closed sharply lower, partly due to profit booking after the recent consistent bull run and a sharp decline in banking stocks over the prevailing strains in the US regional banks.

One of the most prominent lenders in the world of technology startups, Silicon Valley Bank, which was struggling, first collapsed on March 10, after a run on the bank by the depositors. Its closure led to a contagion effect and the subsequent shutting down of other banks, including Signature Bank and First Republic Bank.

The collapse of a few regional banks in the US, which started with Silicon Valley Bank, has sent ripples across the global banking industry and posed fears of a contagion effect across economies.

Earlier in the week, firm GST collections, weakness in the US dollar, and continued foreign fund inflows supported Indian stocks.

Foreign portfolio investors (FPIs) have remained net buyers in Indian stock markets for the second straight month after having sold two months on a trot in January and February, the latest data from the National Securities Depository (NSDL) revealed. FPIs bought assets worth Rs 11,631 crore in Indian stock markets in April and Rs 7,936 crore in March.

“Markets are likely to spend some time around the current levels, after the sharp slide in the banking index,” said Ajit Mishra, VP – of Technical Research, at Religare Broking.

According to Vinod Nair, Head of Research at Geojit Financial Services, “In addition, the (market) cues from global peers were lacklustre as the ECB (European Central Bank) raised rates by 25bps and signalled the need for further rate hikes. Wall Street has witnessed prolonged selling pressure due to apprehensions in the banking sector about the strength of regional banks.”

Going ahead into a fresh week, the release of US and Indian inflation data for April will be keenly watched by the market participants to get a direction.

Meanwhile, consumer inflation in the US moderated in March to 5.0 per cent from 6.0 per cent the previous month, but the numbers are still way above the 2 per cent target. It was at 6.4 per cent in January, and 6.5 per cent the month before.

The US central bank’s current policy rate, which is now in a target range of 5.0-5.25, is the highest in several years, and notably, it was near zero in the early part of 2022. Raising interest rates typically help in cooling demand in the economy and thus helps in managing inflation.

Back in India, headline consumer price index-based (CPI) inflation (or retail inflation) has gradually declined from its peak of 7.8 per cent in April 2022 to 5.7 per cent in March 2023 – which is below RBI’s upper tolerance band of 6 per cent.

The RBI’s monetary policy actions over the past year seem to have reaped dividends in managing inflation.

The Reserve Bank of India, in its first monetary policy review meeting in 2023-24, decided to keep the key benchmark interest rate — the repo rate — unchanged at 6.5 per cent, to assess the effects of the policy rate tightening done so far on various macroeconomic parameters.

Barring the recent pause, RBI has so far raised the repo rate, the rate at which it lends to banks, by 250 basis points cumulatively since May 2022 in the fight against inflation.

Much of the future monetary policy actions by various central banks will also depend on the upcoming inflation data.

“Further clues on the direction that other central banks will take will meanwhile be drawn from the series of inflation figures due in the coming week for the US, mainland China and India,” said S&P Global Market Intelligence in its Week Ahead Economic Preview report.