Hawkish US Fed spooks financial and capital markets

Boiling crude oil prices and hawkish comments by US Federal Reserve chief Jerome Powell led to a sharp fall in equity and financial markets on Thursday. Sensex and Nifty witnessed wild intraday swings as the roller coaster January month derivative series came to a close with the largest selling by foreign portfolio investors (FPIs) seen in recent months. Sensex and Nifty fell by more than 8 per cent from their peak in January so far. 

Government securities (G-Secs) yields jumped about 8-9 basis points to two-year highs and the rupee depreciated against the dollar on Thursday as the US Fed’s Federal Open Market Committee (FOMC) said it expects that it will soon be appropriate to raise the target range for the federal funds rate. 

Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd, said, “Markets are down mainly on the hawkish Fed outlook. Powell, chairman of the Federal Reserve, signalled a rise in interest rates in March and predicted the possibility of an unexpectedly aggressive policy tightening. This has led to an increase in the 10-year bond yields of the US and the dollar index, which is negative for emerging markets. Tensions between Russia and Ukraine have pushed up crude oil prices. With all these headwinds, the market today is facing a monthly expiration date for January F&O contracts, which has added to the volatility.”

On Thursday, Sensex declined by 581 points or 1 percent to close at 57,276. Intra-day the index fell by over 1300 points but recovered as the US stock futures were seen rising. The Nifty was down 167 points or 0.97 percent to close at 17,110. Intra-day the index had declined by more than 400 points. The US Fed did not raise interest rates in the US in its Wednesday meeting but Powell’s post meeting comments are being viewed by many as a hawkish stance. General perception has seeped into the markets that the Fed will slam the breaks on stimulus and start cutting it down aggressively. Powell has signalled a rate hike in March. 

But analysts say the bullish momentum seen in the past few months would take time to return. In India, there is a belief among market players that the bulls could return with a vengeance if the Union Budget announcement next Tuesday does not have any adverse taxes, gives a clear road-map about infrastructure spending, more schemes for attracting global capital and higher spending power to the domestic middle-class.

“The bullish momentum seems broken and new highs may not come in the next few weeks. But in the short term, markets look oversold and a relief rally is due,” said G.Devanathan, Zenture Partners LLP. “Growth and momentum stocks were leading the bull run so far but suddenly the global markets have to adjust to the new reality of rising interest rates that could be swift since the Fed has realised that it is behind the curve. Hence, this violent fall in stock prices, especially the new age tech stocks,” Devanathan said.

After the sharp sell-off in January, India’s stock markets could chart a different course if the budget could change the negative sentiments. 

“For the Modi government this budget is important since it give 24 month time to implement the measures announced now ahead of the 2024 general elections. It is expected that the government, with its bumper tax collections, will step on the gas for infrastructure spending, open up markets with capital convertibility and bring new schemes to attract global funds. Whatever it can do, it has to do now and the government realises this. So the budget will keep the mood buoyant,” said Deven Choksey, MD, KR Choksey Investment Managers. 

Choksey says that part of the fall is also due to the fact that most traders and investors have cut their positions aggressively looking at the huge FPI selling. But if the budget changes sentiments, domestic investors will panic to buy, Choksey said.

In the cash markets, FPIs have sold stocks worth Rs 32,676 crore so far this month as per exchange data. FPI sold index futures worth Rs worth Rs 10,524 crore and stock futures worth Rs 10,383 crore during the month as the exchange data. US stock markets were seen recovering after Thursday’s fall.

Market players say with inflation well above 2 per cent and a strong labor market in US, the hike in federal funds rate could have implications for global economies, including India, as the hike could trigger capital outflows and weaken currencies.

Madan Sabnavis, Chief Economist, Bank of Baroda, said: “The RBI has to take a call at some time on the rewinding of liquidity and the Fed’s long term guidance could be taken as a template by the MPC (Monetary Policy Committee) for consideration.

“We have high inflation and uncertain growth just like the USA. The market is demanding higher yields and the question is how long can the RBI hold on to the present stance?”

Rupee weakens

The rupee (INR) weakened by about 30 paise to close at 75.09 to the dollar (USD) as the greenback strengthened on FOMC’s statement.

The USDINR pair also rose because some banks persistently purchased the US dollar for oil marketing companies, noting elevated Brent crude oil prices,the report said.

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