High inflation and rising interest rates can lead to short-term volatility; Nifty could test 21,000 in FY23, analyst says

Indian markets ended the financial year 2021-22 (FY22) on a positive note despite a series of headwinds, including the war between Russia and Ukraine. The benchmark Nifty50 and Sensex indices each gained more than 18%, while the Nifty midcap and small cap indices gained more than 25% for the year ended March 31, 2021.

On a sector basis, stocks of Nifty Metal, Energy and IT led the rally on D Street in the prior year. Each of these indexes closed the year at close to 62%, 42% and 41% respectively.

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However, Bank Nifty underperformed with gains of around 9%. “The delay in the recovery of credit growth and concerns about rising rates have affected the performance of banking and financial stocks,” Emkay Global Financial Services said in a note.

As the domestic stock market entered a new year in style where benchmarks ended the first trading session of FY23 with gains of more than 1% each, Sunil Nyati, Managing Director of Swastika Investmart Ltd, explains how the market performed in FY22, factors that drove the stock market, IPO and its impact, and outlook for the current FY—Excerpts:

1) How would you sum up the 2021-22 financial year from an equity market perspective?

FY22 turned out to be a good year for the Indian stock market despite many headwinds. Nifty and Sensex ended FY22 with a decent gain of around 18%. The first half was very good, while the market went into consolidation in the second half combined with high volatility.

Speaking of sectors, almost all sectors ended FY22 on a positive note – the metals and IT sectors led with a smart gain of 62% and 41% respectively. The banking index finished with a moderate gain of 9%, while the automotive and consumer staples sectors underperformed due to high commodity prices.

The beauty of the second half of FY22 is the strong resilience of domestic investors amid several global headwinds and relentless selling by FIIs (Foreign Institutional Investors).

2) What were the main factors driving the stock market action in FY22?

The first half was dominated by the 3rd wave of Covid, unlocking a strong recovery in profits. However, in the second half of the year, the market had to contend with tight monetary policy, high inflation, geopolitical tensions and one of the highest FII sell-offs, but as I mentioned earlier, the market showed strong resilience in the face of several headwinds.

3) A large number of IPOs have also been launched in the current fiscal year. Do you think this has also contributed to improving market sentiment?

The market was on a strong bull run in the first half of FY21 which created euphoria in the primary market. We have seen many loss-making companies exit at unrealistic valuations and now their shares are trading at a price well below their issue price. Therefore, in the second half of FY22, we saw negative market sentiment, especially in the primary market.

4) What do you think of stock markets in the future? What factors should investors keep in mind in FY23?

We have successfully scaled all the walls of worry and are poised to outperform in FY23, however, high inflation and rising interest rates can lead to short-term volatility. Aside from inflation, any surprises on the Covid front could pose a major risk to the market.

We believe the next few quarters will be challenging for India Inc. due to high commodity prices. Nevertheless, the long-term outlook is very optimistic for the Indian economy, especially for the facing economic sectors. If we talk about the levels, chances are Nifty will break through the 20,000 mark in FY23, or even test the auspicious level of 21,000.

Disclaimer: The opinions/suggestions/advice expressed herein in this article are solely from investment experts. Zee Business suggests its readers to consult their investment advisors before making any financial decision.

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