Global Rate Hike Cycle Bites Indian Stocks Amid Inflation Worries

The Indian stock market is facing multiple headwinds, including elevated crude oil prices, persistent selling by overseas investors, and a record-low rupee. This has led to double-digit losses for the headline indices, putting them on track for their first annual decline in a decade.

Hopes of a recovery in the final quarter of the year have weakened due to the global interest-rate cycle turning tighter. Global central banks have raised interest rates in response to rising inflationary pressures, driven by the ongoing war in the Middle East.

The US Federal Reserve hiked its federal funds target range to 3.75-4.00% in a unanimous decision, while the Bank of Japan raised its policy rate to 1.25%, its highest level in 31 years. The European Central Bank also increased its deposit rate to 2.50%. These moves have put pressure on the Reserve Bank of India (RBI) to consider raising interest rates in its upcoming policy meeting.

Motilal Oswal Financial Services expects a tightening global interest-rate cycle to impact Indian equities through higher bond yields, tighter financial conditions, and weaker foreign investor flows. The brokerage notes that financial conditions in India are already tightening, with liquidity absorption, higher domestic bond yields, and tighter global financial conditions raising the cost of capital for businesses and investors.