Time consolidation awaits D-Street as global headwinds persist

The market remained sluggish throughout the week as rate hikes and inflationary pressures continued to be major drags. Theoretically, demand-side issues are tackled by the central bank through monetary policies while, the supply-side ones, are via the government’s fiscal measures. However, in the real world when there is a crisis, its cascading effects are felt across borders, sectors, and segments, and more often than not, a combination of fiscal and monetary policies are implemented.

Since the onset of the pandemic, RBI and the government have turned into brothers in arms, and their united efforts have continued even to combat the unparalleled inflation being witnessed currently. While it was widely anticipated that RBI will raise rates and push the brakes, the government has also stepped in and altered import duties to power up the fight against inflation.

This is not the first time such a partnership has taken place.

In 2013, when the inflation rates were hovering in double digits, the RBI increased repo rates and the government put import restrictions on gold and metals. A similar coalition was witnessed in 2018 as well. Post both these instances, the stock market went up by ~50% and ~20%, respectively in the following year.

So while history does provide some hope for stock markets, it should not be mistaken that every time when there has been a policy mix the results have been positive. During the global financial crisis, those countries that combined both the fiscal and monetary policy measures either ended up with a sovereign debt crisis or high inflation later on.

For instance, the European Union did face a debt crisis in 2011 and consequently, the London Stock Exchange did enter into a brief bear market. Therefore, there is no one magic formula to tackle any financial crisis and the success or failure depends upon the dynamics of the situation.

Currently, India’s major focus has been on curbing inflation but at the same time not aggressively hurting its growth and fiscal deficit. Therefore, our stock markets have been comparatively resilient thus far. However, in the wake of constantly changing global macros and the increasing risk of a global recession, it is difficult to judge whether the combined efforts will bear positive results. Amid this uncertainty, it is highly likely that markets will continue to sway sideways and that a time consolidation awaits us.

Technical outlook

Nifty 50 closed this week on a negative note, majorly in line with global equity indices. Currently, the Nifty seems to be heading towards the support zone between 15,900-16,100 levels. Even though this week’s trading patterns hint at the risk of further downside, the overall bearish momentum has slowed down as the Nifty is now trading above the falling resistance line.

Taking into consideration these factors, we suggest traders maintain a mildly negative to a neutral outlook going into the next week. As long as the Nifty does not break below 15,900, there is still a good possibility for an up move up to 16,800 levels.

Expectations of the week
The upcoming week is going to be a roller-coaster ride as a host of important events are slated to release. To begin with, all eyeballs will be on the CPI and WPI Inflation rates and the markets will have a keen eye on whether the import duty restrictions and rate hikes have positively impacted the same.

Further, the data on India’s balance of trade will be avidly tracked as India’s trade deficit widened to a record high level of $23.3 billion in May 2022.

Globally, Fed’s interest rate decision can trigger jitters in the global markets. Investors are therefore advised to be cautious and stay on the sidelines till a clear direction emerges in the market.

Nifty 50 closed the week at 16,201.80, down by 2.31%.