Hotter-than-expected US inflation data may impact Indian stock market, but...

In the United States, the much-anticipated consumer inflation numbers have come in hotter than expected. According to the data furnished by the Labour Department, the annual consumer price index (CPI) came in at 3.5 per cent in March, up 30 basis points from February. Core inflation rose 0.4 per cent.

The acceleration in inflation has slashed hopes of a drop in the interest rate from the Federal Reserve in June. The market had expected as many as six rate cuts this year. That number is now down to two.

Impact on US stock market

Wall Street responded negatively to the news. The three major US stock market indices plunged into the red, and remained there for the entire trading day on Wednesday.

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The Dow Jones Industrial Average shed 1.1 per cent to 38,461.51. The tech-heavy Nasdaq dipped 0.8 per cent to 16,170.36. The broad-based S&P 500 tumbled 1 per cent to 5,160.64.

There can be multiple reasons behind this drop in the market.

With little chance of an interest rate cut in the near future, the prospect of companies getting cheaper credit has also dampened. When inflation rises, the real (inflation-adjusted) return on investments like stocks decreases. This can make other investments, such as bonds or gold relatively more attractive. As people move their money away from shares and into these other assets, the stock market may suffer.

Expected impact on Indian stock market

The impact of US inflation data is not limited to the US. Dalal Street is also likely to feel the heat from the hotter-than-expected digits.

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V K Vijayakumar, the Chief Investment Strategist at Geojit Financial Services told Firstpost how the inflation data could affect foreign investment inflow in Indian markets.

He said that the US inflation coming in higher than expected has spiked the bond yields in the US. “This is negative for FPI [foreign portfolio investor] inflows, which might impact the Indian market.”

However, he believes that the impact is likely to be short lived and marginal. He said that the Indian market is resilient and the rally is driven mainly by domestic liquidity.