Dalal Street may remain range-bound until the US Fed switches to a dovish stance; substantial earnin

While reducing inflation at any cost is a top priority in the short term, we doubt that central banks will be willing to take the long view and risk a protracted stagflation/recession.

By Kunal Valia

The foreign exchange reserves of India decreased from USD 630 billion in September 2021 to roughly USD 580 billion in July 2022. This follows FII selling in the Indian equity markets. The FII sell-off is not just happening in India; it is happening in many developed markets as well as emerging ones. The US Federal Reserve's aggressive rate increase in response to roaring inflation not seen in decades has set off The Sell-Off.

We are witnessing a typical example of the conventional playbook, where higher interest rates in the US cause flows to the US, which strengthens the US Dollar at the expense of emerging nations. The domestic economy is faced with the twin challenges of a significant fiscal deficit and a rapidly expanding current account deficit, even though Indian Equities and Bonds have been robust compared to most markets. While a substantial portion of the fiscal deficit's funding comes from domestic sources, the CAD is a result of import-export movements. Since the Canadian dollar is experiencing a spike and is predicted to get above 3% of GDP by trends, we are especially interested in the CAD data until FY 23. For FIIs, this macro is concerning.

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