Hyper pessimism in the stock markets finally gave way to a rally after the US Federal Reserve announced a lower than expected lending rate hike of 0.75 basis points. Positive commentary by Fed Chairman Jerome Powel about the US economy and jobs growth also buoyed investors.

On Thursday, the Sensex and Nifty witnessed their best single-day gains in nearly five weeks, mainly on the back of short covering on bearish bets. The rupee logged its biggest single day in over two months on the back of robust dollar inflows from exporters and foreign portfolio investors.

The Sensex and Nifty have gained nearly 10 per cent from the low levels that both indices touched in June. On Thursday, the Sensex rose 1,041 points, or 1.87 per cent, to close at 56,857. The Nifty index gained 287 points, or 1.73 per cent, to close at 16,929. The rupee too gained by 14 paise to close at 79.77 against the US dollar.

Trading volumes in the stock markets have been low for the past few days in anticipation of an aggressive hike in interest rates by the US Fed. The central bank hiked interest rates by 0.75 bps for the second time in two months, but the stock markets in the US took a positive cue from the comments of Fed chairman Jerom Powell. He said that the US economy and job growth were strong and the Fed would be accommodative in its stance further to see that it could tackle recession if and when there were signs. The 0.75 basis point Fed hike was expected and factored in by the markets, and hence there was not much of a negative reaction, analysts said. Also, the fact that huge short positions were still pending to be unwound in the US equity markets, as per the data, is signal enough that markets may not crash in a hurry.

Indian markets will outperform

A spike in global inflation on the back of the Russia-Ukraine war has led the global central banks to hike interest rates and taper the quantitative easing to arrest a runway rally in global crude, metal, and food prices. But as a domino effect, this tightening of the policy also sucked away liquidity from the stock markets and curbed banks’ lending power, leading to a slowdown in consumer demand. But analysts believe that India’s markets will keep outperforming the world in the coming months.

“A mild recession in the US and the rest of the world could actually be good for India, which benefits by way of lower costs of commodities and other costs as well as the availability of USD. Markets have already started factoring in the probability of a cut in interest rates by the Fed as fears of a hard landing take root. India has already benefited from the fall in commodity prices lately. In the months ahead, it will also benefit from the lower cost of and availability of USD denominated capital. Most importantly, India’s higher growth differential vis a vis RoW in a growth starved world will act as a magnet and pull in capital flows, “said Sachchidanand Shukla, chief economist at Mahindra Group.”

Commodity prices, including crude and metals, are down by nearly 30 percent to 35 percent in the past five to six weeks. 

Currency moves 

The Indian rupee (INR) ended up 14 paise at 79.76 over the previous close of 79.9025. Market players said the dollar has weakened. Moreover, the contraction of the US economy for the second consecutive quarter could see the US Fed reduce the quantum of rate hikes going forward, which in turn could be positive for the rupee. Though there was no RBI action in the over-the-counter market, it is believed to have sold dollars in the futures market. The rupee closed at 74.63/64 in aftermarket hours of trading.

With inputs from K Ram Kumar

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