Nifty 50 tumbles on hot US inflation data, but is the rally over?

The Indian stock market witnessed a sharp decline on Friday, with the Nifty 50 index plummeting 1.03% to 22,519.4. This marks the steepest one-day percentage drop since March 19th, 2024, when the index fell by 1.08%.

The primary culprit behind the market selloff appears to be hotter-than-anticipated inflation data released in the US. Consumer Price Index (CPI) figures came in at 3.5%, exceeding the projected 3.4%. This unexpected inflation surge dashed hopes of an interest rate cut in the US this year, leading to widespread selling across markets.

Adding fuel to the fire, significant selling pressure emerged from Foreign Institutional Investors (FIIs) who remained net sellers for four out of the past five sessions, resulting in a net outflow of INR 6,526.71 crore. Further anxieties surrounding potential changes in the India-Mauritius tax treaty fueled a selling spree on Friday, with FIIs offloading a staggering INR 8,027 crore.

Gold’s relentless ascent also indicates a flight to safety, as investors seek refuge in this traditional haven during market volatility. However, a broader perspective of the Nifty 50 chart reveals a fundamentally positive trend. The index continues to hover near its all-time high, and a single day of decline doesn’t necessarily negate the ongoing upward trajectory.

The Nifty 50 appears poised to test its support zone at 22,300. This level presents a potential entry point for long positions if support holds. A breach below this zone could signify a shift towards a rangebound market rather than a sharp downturn, considering the underlying bullish sentiment and upcoming elections.

The India VIX index, a volatility gauge, surged 3.78% to 11.53 on Friday, indicating a rise in option premiums due to heightened volatility fears. In this environment, adopting hedged positions carries more favor compared to naked options trades.

Further, traders should be aware of a significant change taking effect on April 26th, 2024. The Nifty 50 lot size will be reduced from 26 to 25. Factor this adjustment into your trading positions to avoid any potential complications.