Buckle up, Our bourses just felt the world

Mayhem has caught up with the Indian stock market as investors worldwide calibrate their portfolios to the extent of a global economic slowdown. The carnage on Indian bourses has been muted so far, with the Sensex and Nifty retracing gains of the previous two months as the Dow Jones Industrial Average is poised to enter a bear market. Frontline stocks are holding out better than the broader market, which has cracked more. The selling is across sectors, although there is some buying interest in Indian technology stocks that have been under pressure since the US Federal Reserve signalled its intention of bringing runaway inflation to heel. Indian stocks have been relatively insulated by earnings projections in the world's fastest-growing major economy. Yet, the domestic demand recovery is facing headwinds from the global slowdown and supply disruptions.

Market volatility following a whiplash week that saw the dollar rising to new peaks, bond prices collapsing and crude oil retreating on the prospects of lower demand will remain high as RBI goes into its rate-setting huddle. Expectations are rising that the hike could be aggressive to counter persistence of inflation, rupee depreciation and a narrowing of the interest rate differential with the US.

Asset classes are now being revalued against the intensity - not the likelihood - of recession in advanced economies. A World Bank study estimates synchronised increases will double global interest rates from 2021 and that may not be good enough to pull down core inflation. If central banks go further with interest rate hikes, the world economy would tip into a technical recession. Emerging economies like India, which are not witnessing wage inflation fed by excessive pandemic-era stimulus in advanced economies, are now exposed to a possible liquidity shock as central banks unwind accommodative positions at the fastest pace in half a century. A worldwide per-capita income decline - a global recession - will be accelerated in developing economies that face a greater likelihood of financial crises.