Markets likely to stay volatile

The National Stock Exchange’s Nifty index posted a weekly loss of 2.7% to 17,465.80, a four-month low, amid FPIs selling a provisional ₹1,470.34 crore worth of shares on Friday alone.

The Adani saga and a weaker rupee are playing spoilsport for markets. US short-seller Hindenburg Research’s allegations of fraud and manipulation against the Adani group have destroyed investor wealth by $140 billion. While Indian regulators such the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) have said the crisis would not have a systemic fallout, global investors are concerned about the rout in the group’s dollar bonds and stock prices since the crisis emerged.

The rupee is adding to the FPIs’ woes as a weaker currency cuts their dollar returns when they repatriate their profit from the Indian markets. The rupee has remained volatile and weakened by 0.23% since the beginning of the year, pressured by a widening trade deficit and rate hikes by the US, which reduces the risk-free rate of returns from EMs for foreign investors.

India’s trade deficit widened to $17.75 billion in January from $17.42 billion a year ago. India’s FY23 fiscal deficit reached 59.8% of the full-year target during the April-December period.

Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd, said that “we expect the market to consolidate in the absence of any fresh trigger. However, stock-specific action could be seen.”

Analysts have said that tight labour markets in the US and stubborn core inflation, stripped of volatile food and energy prices, would mean that Fed would keep rising rates for longer than expected by global investors. This would spook EMs like India, which has seen the Nifty fall from a record high of 18,887.60 on 1 December.

Apart from GDP and PMI data, Auto sector stocks would be in focus on the back of monthly (February) sales data to be announced in the week.

The major factor that has been causing a bend in the river is the avalanche of economic data, mostly from the US, that carried hints that the economy might be stronger than one thinks, inviting an inference that there could be further policy tightening in store, said Joseph Thomas, head of research, Emkay Wealth Management. Thomas added that these pressures will not go away soon and could dominate discussions and markets for another quarter or so.

In their monthly outlook report, Credit Suisse Wealth Management India, too, said, “We expect India’s near-term equity performance to remain subdued and volatile due to multiple headwinds.” Credit Suisse expects the Indian equity market to be more volatile and choppy in the first half of 2023.

The uncertainty on FPI flows also continues after the correction in the valuation premiums of Indian markets compared to emerging markets has reduced.

Indian markets have been fairly range-bound for more than a year now and that means valuation correction has happened and premium to other emerging markets, especially China, has reduced quite a bit, said analysts.

Nifty valuations are now in the comfort zone and are trading at long-term average PE multiples, said Manish Jain, a fund manager at Ambit Asset Management.

V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, also said that Nifty is now trading at around 18 times FY24 earnings. Considering India’s growth prospects, valuations are fine but certainly not cheap, particularly relative to valuations of other emerging markets. The phase of sustained selling by FIIs appears to be over since they have been buying in recent days. But they might sell at rallies. Rising rates in the US might lead to more capital outflows from emerging markets.

FPIs are sellers not only in cash but have also taken short positions in the derivatives segment of NSE.

As of 24 February, they were cumulative net sellers of 107,761 index futures contracts.