Domestic stock markets and the rupiah faced tough weather conditions in early trading on Monday as the sharp rise in US inflation sparked concerns over more aggressive rate hikes and larger capital outflows. The benchmark Sensex traded 1,422 points at 52,881.23 and the Nifty index traded 408 points at 15,793.15 as of 12:15 a.m. IST. The the rupee dipped below 78 to 78.28 against the dollar at the opening session.

Why the accident?

Indian stocks fell 2.6% in the opening session as equity markets around the world witness a massive sell-off after May inflation data in the United States accelerated to 8.6% , a four-decade high, raising concerns about aggressive rate hikes by the U.S. Federal Reserve in the next monetary policy meeting scheduled for Wednesday. Yields on US Treasuries hit a 14-year high of 3.15% while the dollar index climbed above 104 levels. US futures are also down 1% after Friday’s big selloff. Other than that, the market would continue to remain cautious ahead of the various central bank meetings this week.

Domestically, with India’s inflation data due Monday, investors are worried about the RBI’s next course of action. If retail inflation picks up further and breaks through the 8% level in India, the RBI could raise policy rates again this month. The yield on India’s benchmark 10-year bond rose 7 basis points to 7.59% on Monday.

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Overall, domestic and global concerns are hurting sentiment in India. The withdrawal of dovish liberal policies in India and other countries, primarily the United States, is prompting investors to hit the sell button. Capital outflows from foreign portfolio investors are likely to continue in such a scenario.

Why is the rupee falling?

Rising US inflation, rising rate concerns and falling stock market are weighing on Rupee sentiment. Further rate hikes by the US Fed will lead to increased outflows from Foreign Portfolio Investors (REITs) who have already withdrawn Rs 18,814 crore from equity markets in June so far. REITs have withdrawn Rs 2.40 lakh crore from India since January this year, putting pressure on the rupee.

The rupiah fell below the 78 level against the dollar on Monday morning as the RBI was not seen selling dollars. The falling rupee should make imports more expensive and exports lucrative. “We could see more weakness ahead of the June 15 FOMC meeting, where the Fed is expected to raise rates by 50 basis points and adopt a more aggressive tone. However, runaway depreciation might not happen under RBI intervention,” said Jigar Trivedi, Research Analyst, Anand Rathi Shares & Stock Brokers.

When will the markets recover?

The Indian market will only stabilize when the US market stabilizes and rate hikes by the US Fed cease. The market will rebound when REITs come back and start pumping money again. “Therefore, investors can wait and watch until clarity emerges on the market trend. The 7.1% increase in PII, which indicates that the Indian economy is doing well, is a good sign. positive side,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Analysts said investors should stay invested if they have a long-term investment plan, and mutual fund investors should continue their SIP plan without pausing investing. On the other hand, the big correction will give investors the opportunity to acquire good quality stocks at attractive levels. “Investors should wait and watch developments before making major commitments. Buying should be limited to stocks/segments that are properly priced or have good earnings visibility,” one analyst said.