US Fed meeting today: FIIs wait and watch, factor in 25bps rate hike

Mumbai: Foreign institutional investors (FIIs) have largely discounted a 25 basis point (bps) hike by the US Federal Reserve ahead of the central bank’s 13-14 December policy meet and are in a wait-and-watch mode before the outcome, which will be announced late on Wednesday. They have already sold $2.6 billion of shares in the month till Monday.

Though FIIs are buying some downside protection—by purchasing out-of-money put options—it is not as strong as it is generally ahead of Fed meetings, dealers said.

ALSO READ | A dollar winter is coming

A put option (one that gives the owner the right to sell the underlying security at a specified price and within a certain time frame) is said to be out of the money if the current price of the underlying stock or index is above the strike price (or price at which the option can be exercised).

“There is no real fear pertaining to FOMC (Federal Open Market Committee) meet,” said S. Hariharan, head of sales, trading, at Emkay Global Financial Services Ltd, adding that people are buying downside protection in general to cover for a likely further strengthening of the US dollar, and the after-effects of demonetization.

A Fed rate hike of 25bps is priced in on the back of stronger US economic data such as a steep drop in jobless claims and upbeat housing data. (A basis point is one-hundredth of a percentage point.) If the rate hike does happen, it would be the only second since the global financial crisis in 2008.

Fed fund futures show a 93.2% probability that the Fed will lift rates by 25bps at the end of its two-day policy meeting on Wednesday, according to data from the CME Group.

“In fact, FIIs have squared off some part of their index futures net short positioning in the last few sessions. Activity has been muted and there does not appear to be any strong directional bias to trading at the moment,” said Emkay’s Hariharan.

With the rate hike largely discounted, all eyes will be on the tone of the Fed’s commentary, especially its view on the US economy’s trajectory after Donald Trump’s surprise win in the US presidential election.

With Trump saying that he plans to cut taxes and boost infrastructure spending, better growth and higher inflation could accelerate the pace of the US central bank’s rate hikes in 2017.

Following Trump’s win, the US dollar index, the measure of the greenback against a basket of six major currencies, has rallied 3.35%, prompting FIIs to flee towards dollar assets. In the same period, the Indian rupee has corrected 1.35% and closed at 67.5 per dollar on Tuesday.

ALSO READ | Gold prices dip slightly ahead of US Federal Reserve meeting

FIIs have been sellers of Indian shares in 19 of the 22 sessions starting 9 November, and sold a net of Rs2,181.03 crore of Indian shares on Tuesday.

BSE’s benchmark 30-share Sensex has eroded 3.28% since 8 November, when the government in an attempt to curb black money, withdrew Rs500 and Rs1,000 notes. The move weighed on Asia’s third largest economy’s consumption story, which was set to perk up after a long hiatus, on the back of a good monsoon.

“Unlike previously, FIIs are not aggressively buying downside protection in the market” said Sahaj Agrawal, deputy vice-president of derivatives at Kotak Securities Ltd,

“Market has already seen a correction along with volatility. We are seeing open interest built up at 8,000 put and 8,300 call options, and the market is likely to be trade in that range in the current series. We have seen some extraordinary price movement post demonetization and US elections, which should be technically followed by range-bound movement,” added Agrawal.