How will higher US inflation affect Indian markets?

Stock Market

As US inflation data came out higher than expected, how will Indian markets fare after discounting the new data? Analysts believe the Indian markets will have couple of weak trading sessions and will wait for more US micro economic data to gauge the situation. The increased inflation also rules out possibility of rate cuts in March.

The US stock markets have opened lower after US inflation data came out higher than expected which also spiked the US bond yields.

US CPI data rose by 0.3 percent on monthly basis, while on annual basis it was up 3.1 percent. Analysts expected inflation to increase by 0.2 percent on monthly basis and a 2.9 percent increase on yearly basis.

The US 10-year bond yield gained by 2.6 percent and US Dollar index rose nearly 0.6 percent. The Dow Jones Industrial Average fell 1.11 percent and S&P 500 fell 1.29 percent.

Analysts say the rise in US Bond Yield and US Dollar Index is a bad sign for emerging markets including India, and it will have 2-3 trading sessions where sentiment will be negative.

Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, said the rising US bond yields and Dollar index are extremely bad signals for emerging market and they will underperform for next couple of trading sessions because of the “double whammy”.

He reasons while the emerging market will not be impacted by US bond yields, the rising dollar index will have a negative impact.

Kranthi Bathini, Director of Equity Strategy in Wealth Mills Securities, said there will be consistent negativity for Indian markets if the US markets don’t recover by the end of the session.

While the inflation data is expected to dent sentiments in the next couple of trading sessions, analysts believe the impact won’t be hard as the market will wait for more data points.

Vikas Gupta, CEO & Chief Investment Strategist of Omniscience Capital, said that markets will wait for more US data like PCE data, employment data and the negative sentiment is likely to be temporary as previous employment data has been strong.

Siddharth Bhamre, Head of Research of Religare Broking doesn’t see any reason for prolonged correction in the market as one data point won’t change the medium-term perspective of FIIs towards the Indian markets. He says the US economy can manage with the heightened interest rates as microdata like employment data has been good and delay in interest rate cuts is not bad news for the market.

“As long as interest rates are maintained, that means the Fed is comfortable because the growth numbers are trickling in. I believe that the interest rate would decline only when the growth numbers are faltering”, he added.

Amit Goel also said the impact will be for 2-3 sessions as the market will wait for Nvidia’s quarterly numbers on February 21. He reasons that the current rally is based on AI theme and since Nvidia is the company which epitomises the AI rally, further market sentiment will be decided after Nvidia earnings come out.

All the analysts concur that new data has decreased the chances of Fed rate cuts in March.

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