In the time of rampant market volatility, it is difficult for everyone to clearly see the directions of market. With mere news related to war or no war, interest rate hike or no hike, etc market is showing volatility of more the 300 to 500 points upward or downward in a day’s time. The recent event of Budget showed some great volatility in the market. The abundant of liquidity has created abnormal movement in market. The VIX is also crossed 20.
In the current context, we are seeing constant selling by FIIs since October and bailing out of market by DIIs through money received from SIP or Mutual Fund investments. So, at present let us understand what all are upcoming factors which FIIs might be considering:
- Weight of Indian MSCI Emerging Market Index
The MSCI Emerging Market Index includes Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates. As on 31.12.2021, the weight of India is roughly 12.45% while the weight of China is 33% and most of the shares are related to China A companies. In last one year, we have seen huge correction in China A shares listed in this index. Most of the markets stated above have seen 10 to 15% correction alone e.g. Russia, Brazil, Taiwan, Korea, Turkey etc. Though the factors for correction may be different but one thing in all those markets were common i.e. rate hikes by central banks. Due to policy measures and monetary tightening, we saw some severe correction in Chinese market. Considering this factors, Indian Market has hardly corrected from its recent high. Therefore, we will see some rebalancing of this index in terms of weight where the weightage of India will again get reduced. Looking at the P/E of India market, FIIs will surely go for these markets before re-entering into India Market.
- Upcoming Elections
We have elections in 5 states namely Goa, Manipur, Punjab, Uttar Pradesh and Uttarakhand. The main focus is on U.P. as it is the largest state in India and whose result will set the policies and direction of Centre in future. The results of these elections are on 10th March 2022. Based on current scenario and market speculation, the chances of winning of existing Government is moderate to high. But optimism is already at peak which means there is no further scope for markets to react to a win while seat decline will be seen negatively. The election results will be giving major direction and add to existing volatility.
- Hike in Petrol and Diesel Prices
At present the prices of Crude in international market are above $90 and are on the verge of touching $100 mark. This is a very critical situation as the OMCs who are claimed to be independent are not in a position to increase prices and pass on the burden to customers. The estimated tax collection of hike in Prices of Petrol and Diesel is more than 3 Lakh crore alone for Centre. It is believed that at present, the OMCs are incurring loss of Rs 20 per litre. For two months in a row, no price hike has been made. This will add to the burden on Fiscal Deficit of Government. So post-election, independent price discovery mechanism will again be readopted and prices will get hiked by minimum of Rs 10 per litre though in phases. We need to see how much loss will it add to Treasury before the OMC starts earning profits. Oil prices may also fuel inflation.
- Rate Hike by RBI on cards and rise in Indian Bond yields
Though the noise of FED rate hike is prevailing around, we should not forget that internationally, many developed and developing nations have already hiked their domestic interest rate. Recent example is of Argentina which raised its benchmark interest rate by 250 basis points to 42.5%, Bank of Russia which increased key rates by 1% to 9.50%. Further, as per IMF policy, a country needs to keep its interest rate above the Inflation rate. So, at present our bond yields are 6.70% and Inflation is above 6%, we can soon see RBI to hike interest rate in future. Post elections we can also see hike in Petrol prices which will again add to inflation. So, the gap cannot be kept narrow between Inflation and Rate of interest. So, hike in interest rate will cause liquidity drainage from market and will tighten fiscal policy. Further the loan taken by Central Government of 90 Lakh crore will become costly & outflow of interest liability of more than 7 lakh crore annually will get increased by Rupees 30000 crore to 50000 crore. This will again plough back the money allocated for growth to Interest serving portion. Further any rate hike will start derailing the IIP numbers and add to the volatility in the market.
- Fed Rate hike fears
Though this point has been covered in out previous post, but at present the biggest risk which emerging markets from Asia are facing is Quantitative Tightening or tapering. This has created risk flight of domestic currencies from Emerging market to US. As post inflation, the real return is hidden. Tapering will cause severe dent in valuations of Emerging market like India which is already overvalued. The Fed is expected to raise rates in its meeting on 15-16th March 2022. This should be a significant volatility creating event.
- Russia invading Ukraine
The ongoing dispute between Russia and Ukraine created some limelight in social media. Though various analysis are available in Social media, we will only point some new angle into this. As people are aware that Europe’s energy is dependent on Russia so Europe is at present on Backfoot. Without support of Europe, US will be unable to do anything. So, Russia will keep its fight on till it becomes too late for US and Rest of the world to put sanctions on Russia.
The current events in Ukraine is keeping global markets on its tows. The USA market has seen significant correction along with Indian markets. India though not at the centre of the issue will face problems with its dealings with Russia should the USA impose sanctions on Russia. Given that we are in middle of procuring critical S-400 missile systems, it will impact our acquisition process. Oil prices are expected to ramp up along with gold prices and India imports both these materials which will increase deficit. Further escalation will lead to more volatility.
There are several small but important factors that will impact liquidity in the market.
- Advance Tax Collection: Advance tax payment will lead to short term mutual fund outflow and will impact the liquidity in the market. This should lead to lower liquidity.
- LIC IPO: The insurance behemoth is expected to list its equity shares in the market and FPO is expected to garner Rupees 75000 crore from the market. It will act as additional liquidity drain.
- New rules and regulations regarding margins: As per new norms, 50% of the cash will have to be provided for FnO trades as margins. This will reduce the liquidity and it was seen as a sell off event in November when it was deferred to 28th February 2022.
Considering these factors, it is advised to investors to keep a watch on upcoming events for volatility and liquidity. Every time, unidirectional movement of market will not work. In such situations, the margin of safety of capital is more important than return on Capital. Opportunities will come with time and lost capital doesn’t necessarily come after market correction.
– By Nishant Maheshwari & Vishal Vora
Disclosure: The above article is based on views expressed by the authors and are meant for information purpose only. Readers are requested to take investment decisions by consulting their financial advisors.
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