Downside Risks to the Indian Equity Market in 2022
Downside Risks to the Indian Equity Market in 2022 are as follows:
• Tightening of the Monetary Policy in the United States & other Advanced countries poses a downside risk to Emerging Markets like India
• Faster Tapering of the Fed’s Asset purchase program (Quantitative Easing program(QE)) can cause other advanced economies to follow suit ie unwind their QE program– this will lead to sucking out of liquidity from Global financial markets.
• An aggressive monetary tightening by the US can cause the bond yields to rise in the US and the dollar to strengthen against emerging market currencies. Means emerging market currencies will depreciate against the US dollar. Means the Rupee will depreciate against the US dollar
• Further more The risk arbitrage for FII’s, FPI’s may no longer be attractive & the hot money can move out of emerging markets. We can see FII’s selling in Emerging markets like India and taking money back to the US. This can cause the Rupee to depreciate further to the dollar.
• Moreover A depreciating Rupee will make FII, FPI investments in Indian equities even more unattractive which can lead to further sell off by FII’s. So there is a risk of FII outflows from Emerging markets like India. We just hope we don’t get to see a cascading effect of FII selling in the Indian Equity Market in 2022. We do have our Domestic Institutional Investors (DII’s) to lend support to the market in case there are sharp corrections in the market.
Downside Risks to the Indian Equity Market in 2022
• Faster pace of Quantitative Tightening by the Fed can be very disruptive for emerging markets – Feds Balance sheet stands at $ 8.7 trillion around 37% of GDP. Fed hints at a faster Quantitative Tightening.
• Depreciating Rupee will hurt our imports especially of crude oil. The Rising crude oil prices & a depreciating Rupee will make our imports even more costly.
• Risk of Inflation – Rising commodity prices, rising crude oil prices along with a depreciating Rupee will create inflationary pressures in our economy
• Interest rate cycle turning. Interest rates expected to be on the rise in India
• China housing sector woes is a cause of concern.
• Ongoing Geopolitical tensions – US-China, US-Iran, Ukraine-Russia is also a cause of concern
• Several emerging market countries (like Brazil, Hungary) will have major elections
• The Covid-19 Wave 3 continues to pose a risk globally & in India.
To conclude The Indian Equity Market is expected to remain volatile in 2022 with Tightening of the Monetary Policy in the United States. Corrections in the Indian Equity Market healthy for the markets and will give opportunities to invest for the long term.
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