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What Awaits the Financial Markets in 2022?

The Covid-19 pandemic has wreaked havoc on economies across the world for almost two years. Following an unprecedented economic lockdown in 2020, governments and central banks throughout the world reacted quickly by imposing fiscal and monetary stimulus to counteract the setback. Following a tenacious second wave in early 2021 (with human collateral damage outweighing the physical damage), the Indian economy began to open gradually with a healthy rebound in economic activity and corporate earnings. As a result of the global liquidity boom, several global markets, including India, reached new highs.

The stimulus programs announced by governments to aid national economies led to a steep rise in inflation in the past two years. While inflation in India remained relatively moderate, the global giant United States witnessed a four-decade price hike during the pandemic. Thus, the Federal Reserve opted to accelerate the pace at which it reduces monthly asset purchases; as a result, interest rates are expected to double, if not triple, in 2022.

Market investors believe that the speed with which the Fed is withdrawing stimulus and raising interest rates may lead to destabilization of the stock and debt markets in the future. Foreign portfolio investors (FPIs) have also been pulling out of Indian equities since the Fed began tapering i.e., putting pressure on the benchmark indices.

Equity and Debt Markets

"Investors will have to moderate their expectations of returns from equities in 2022. It is a fair value market. If Omicron does not cause big disruption, domestic retail inflows remain stronger than FPI outflows, and corporate earnings remain strong, then it will outperform other asset classes,” said Nilesh Shah, MD, Kotak Mahindra AMC.

According to market experts, while interest rates may kite in 2022, inflation would not be a major concern in the Indian subcontinent. Even if the omicron variant causes significant economic disruption, equities will continue to fare well and domestic retail flow into equities will remain greater than the FPI outflows.

Government bond yields have begun to harden. The market is pushing interest rates higher in anticipation of the rising cost of capital. Meanwhile, Reserve Bank of India (RBI) has strayed from central banks in industrialized countries and argued for the need to retain an accommodative approach. The largest state-owned institution, State Bank of India, raised its base rate by 10 basis points to 7.55 percent this month, a positive indicator of the low-rate period coming to an end.

Rising yields impact house loans as well. As banks aim to pass on any cost increases to clients, floating rates may continue to climb. From a peak of over $2,120 per ounce in August 2020, gold rates fell to around $1,800. On predictions of rising interest rates and inflation, gold is projected to remain positive in the next months and gain momentum if it closes above $1,850.

Another Buoyant Year for Primary Issue Markets

The IPOs pipeline is expected to remain robust with 68 companies, including the much-anticipated mega LIC offering, set to push the overall mop-up to almost ₹1.5 lakh crore. In 2021, the IPO market hit an all-time high of ₹1.18 lakh crore through 63 offerings, which is almost 4.5 times what was raised in 2020. Last year, several new-age loss-making technology start-ups with a strong market presence assisted in driving the IPO frenzy.

An Outlook

Although the issue is still underway, the omicron variant has prompted some doubts about a possible third wave. Increased vaccination coverage in India and around the world, on the other hand, may assist in mitigating the social, economic and financial impact that may ensue following a new wave. The second Delta variant wave revealed that lockdowns had been fine-tuned, and businesses had been able to respond successfully to it, resulting in less economic losses than the initial lockout in 2020. The resurgence of corporate earnings in India, after a long period of stagnation, also serves to bolster sentiment. If profits growth continues to accelerate as predicted, it may help to underpin and temper present high market values. The financial calendar will certainly mark 2022 as a memorable year for India’s financial markets.

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