Why are markets and the rupee falling?

As of 12.15 IST, the benchmark Sensex was trading 1,422 points lower at 52,881.23 while the Nifty Index was trading 408 points lower at 15,793.15.

Domestic stock markets and the rupee were battered in early trade on Monday, as fears of more aggressive rate hikes and larger capital outflows arose in response to a steep jump in US inflation. As of 12.15 IST, the benchmark Sensex was trading 1,422 points lower at 52,881.23 while the Nifty Index was trading 408 points lower at 15,793.15. In the first session, the rupee fell below the 78 barriers, falling to 78.28 against the dollar.

What caused the crash?

In the first session, Indian equities sank 2.6 percent as equity markets around the world sold down after US May inflation data jumped to a four-decade high of 8.6%, stoking fears of aggressive rate hikes by the US Federal Reserve at its next monetary policy meeting on Wednesday. Treasury yields in the United States soared to a 14-year high of 3.15 percent, while the dollar index climbed above 104 points. After the massive sell-off on Friday, US futures are also down 1%. Apart from that, the market will remain cautious ahead of this week's meetings of major central banks.

On the domestic front, investors are anxious about the Reserve Bank of India's next course of action, as India's inflation report is due on Monday. If retail inflation in India rises to 8%, the Reserve Bank of India (RBI) may raise policy rates again this month. On Monday, the yield on India's 10-year benchmark bond increased by 7 basis points to 7.59 percent.

Overall, India's mood is being harmed by internal and global concerns. The retreat of liberal accommodative policies in India and other nations, particularly the United States, has prompted investors to sell. In such a scenario, capital outflows by foreign portfolio investors are expected to persist.

Why is the rupee depreciating?

The rupee is under pressure due to rising US inflation, fears of rate hikes, and a drop in the stock market. Foreign portfolio investors (FPIs) have already withdrawn Rs 18,814 crore from the equity markets in June as a result of more rate hikes by the US Federal Reserve. Since January this year, foreign portfolio investors (FPIs) have taken out Rs 2.40 lakh crore from India, putting pressure on the rupee.

Rising inflation in advanced nations has caused global central banks to not only withdraw their ultra-loose monetary policy but also hike their policy rates, according to India Ratings and Research, even before the RBI's policy action on May 4, 2022. After a three-year hiatus, the US Federal Reserve hiked its policy rate by 25 basis points (bps) in March 2022, then followed it up with another 50 bps hike in May 2022.

The rupee is under pressure due to rising US inflation, fears of rate hikes, and a drop in the stock market. Foreign portfolio investors (FPIs) have already withdrawn Rs 18,814 crore from the equity markets in June as a result of more rate hikes by the US Federal Reserve. Since January this year, foreign portfolio investors (FPIs) have taken out Rs 2.40 lakh crore from India, putting pressure on the rupee.