World comes huffing to Indian markets

Indian equities added to global financial turbulence this week with the country’s largest private lender, HDFC Bank, reporting sluggish growth in deposits. This contributed to uncertainty over anticipated interest rate cuts by the US Fed, causing heavy selling by FPIs on Indian bourses. Pressure on bank earnings is likely to endure with credit-led consumption slowing down and deposit rates yet to catch up with steep rise in RBI’s policy rate. Bank deposit growth has been quickest in the last six years. But it has not matched the surge in credit growth. With the central bank keeping a lid on liquidity in the financial system, banks are finding it difficult to crank up deposits without affecting margins. RBI has not provided any indication on how long policy interest rates will continue to remain at their current levels before they begin to dip, making investors skittish about their holdings in Indian banks.

Nifty bank and financial services subindices are driving the fall in headline index. Given their weight in Nifty, the effects are considerable. Nifty technology sub-index is also being affected by fears of a longer credit squeeze in the US as consumer spending remains stronger than expectations. This is part of heightened volatility in global markets that have run up in anticipation of a soft landing of the US economy.

Indian equity market is correcting to the possibility of further internal and external consumption demand compression. Domestic consumption is poised to yield the baton to investment crowded in by government capital expenditure. Outlook for Indian IT exports has been subdued for several quarters, slowing down hiring in a key industry. HDFC Bank counter and IT stocks have been longtime favourites of FPIs, and their jitteriness could be infectious. However, Indian investors may be more sanguine and arrest the fallout of capital flight as they did during the pandemic and Russia-Ukraine conflict and ensuing Western sanctions.