India likely to see relief rally as US Fed maintains status quo

The US Federal Reserve left key policy rates unchanged and slowed the pace of future hikes


The US Fed did signal it could hike rates by year-end as the labour market improved further, but cut the number of rate increases expected in 2017 and 2018. Photo: Bloomberg
The US Fed did signal it could hike rates by year-end as the labour market improved further, but cut the number of rate increases expected in 2017 and 2018. Photo: Bloomberg

Indian markets joined the party in world equities after the US Federal Reserve left key policy rates unchanged and slowed the pace of future hikes.

While the Fed decision did not bother with any negative surprises, the US central bank did signal it could hike rates by year-end as the labour market improved further, but cut the number of rate increases expected in 2017 and 2018. It also reduced its longer-run interest rate forecast to 2.9% from 3%.

At the same time, policymakers cut the number of rate increases they expect this year to one from two previously, according to the median projection of forecasts released with the statement. Three of the Fed’s 17 policymakers said rates should remain steady for the rest of the year.

In reaction, the S&P 500 rose 1.1%, while Dow Jones Industrial Average added 0.9%. The Nasdaq Composite climbed 1.3% to close at a record high. Elsewhere in Asia, China’s Shanghai Composite Index rose 0.54%, while Hong Kong’s Hang Seng Index added 0.38%.

In India, BSE’s 30-share Sensex closed 0.93% higher at 28,773.13 points on Thursday, while the National Stock Exchange’s 50-share Nifty added 1.03% to close at 8,867.45 points.

“The Fed did not really surprise the market with its no change in policy rate while become even more conservative in its projection of how policy rates will go in the next couple of years,” said Tai Hui, managing director and chief market strategist Asia at J.P. Morgan Funds.

The US central bank’s decision followed Bank of Japan’s decision to maintained its 0.1% negative interest rate.

The Japanese central bank, however, abandoned its base money target and instead set a yield curve control under which it will buy long-term government bonds to keep 10-year bond yields around current levels of 0%.

While the Bank of Japan has changed its policy framework in design, nothing much changes in substance, as the loose monetary policy continues.

“Overall, we believe this is positive for EM (emerging markets) and India since a cautious Fed should continue to cap the strength of the US dollar, which historically has benefitted EM and Asia,” said Hui.

“Fear of capital outflow is reduced, which also allows EM central banks to adopt a less restrictive monetary policy,” Hui added.

The probability of the Fed maintaining the target rate at the current level of 25-50 basis points in its November meeting rose to 89.7% from 87.6% a day before, data from CME Group’s FedWatch site showed. The likelihood of keeping rates unchanged in its December meeting was at 42.6%, slightly higher than 41.6% a day before.

Strong risk appetite and abundant liquidity has driven world equity markets higher this year, and there is no immediate risk to this rally other than individual market-specific risks.

Indian markets, being one of the key emerging markets, with relatively stronger economic parameters, have been one of the preferred investment destinations for foreign investors.

Foreign institutional investors (FIIs) have pumped in a net of $6.8 billion in Indian shares for year to date, fuelling 10.17% gains for the Sensex.

In the same period, benchmark equity indices of emerging market peers Brazil and Russia rallied 36.39% and 32.12% respectively. On the other hand, those of China and South Africa dropped 14.04% and 1.39% respectively.

Ahead of the Fed policy meet, divergent voices from Fed officials, coupled with mixed set of economic data from US, had unnerved a section of investors.

“In the last few days, there were some concerns that had sparked off, that Fed may hike rates that as inflation was inching up towards Fed’s comfortable zone. They came very close to that (a rate hike), given the divided views of the Fed members, but eventually the rate hike did not happen,” said Ritesh Jain, chief investment officer, Tata Asset Management Ltd.

“As long as dollar does not strengthen, there will be a rally in emerging markets and commodities. It is also a positive for precious metals, since dollar weakened,” added Jain.

In the Indian market on Thursday, only one sectoral index—the BSE IT index—closed lower. The BSE Finance index and the BSE Oil and Gas index led the gains, as they climbed 1.65% and 1.51% respectively.

Twenty-one of the 30 Sensex stocks closed higher.

State Bank of India, the country’s largest lender, rose 2.39%, while two-wheeler maker Hero MotoCorp Ltd. surged 2.27%, leading the gainers’ pack among Sensex stocks.

Reuters contributed to this story.

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