Mumbai: India regaining its position as the world’s fastest growing major economy failed to impress the stock markets on Thursday, as traders worldwide braced for tighter liquidity following US Federal Reserve chairman Jerome Powell’s hawkish comments on rate hikes.

After a choppy trading session, the BSE Sensex ended at 34,046.94 points, down 137.10 points or 0.40% from the previous day’s close, while the National Stock Exchange’s, (NSE’s) broader Nifty index lost 34.50 points or 0.33%, to end at 10,458.35 points. Clearly, the higher-than-expected December-quarter economic growth of 7.2% was not enough.

Global markets continued to fall after Powell indicated the US central bank could hike rates more than three times this year, rattling investors across regions.

Stock markets in Japan and Korea fell more than 1% while markets in the US were negative.

In his first testimony on Tuesday before the House Financial Services Committee, Powell acknowledged that stronger economic growth may prompt policymakers to rethink their plan for three rate hikes for 2018, outlined in the Fed’s Summary of Economic Projections in December.

Analysts said rising US 10-year bond yields and Fed rate hikes may impact the liquidity that has kept Indian markets afloat. So far this year, foreign institutional investors (FIIs) have bought $371.90 million worth of Indian shares, while domestic institutional investors (DII) pumped in Rs18,211.74 crore.

Siddhartha Khemka, head of research (retail), Motilal Oswal Financial Services Ltd, said the increase in interest rates in the US is sentimentally negative. “It may impact liquidity," he added.

He thinks the volatility in Indian markets may continue for three-to-six months.

“Bouts of volatility are expected due to both global events and domestic factors like upcoming elections," Khemka said.

Results of state elections in Tripura, Meghalaya and Nagaland will be declared on 3 March.

Five more states will go to polls this year before the general election scheduled in 2019.

According to Teena Virmani, vice-president-research at Kotak Securities Ltd, after better-than-expected gross domestic product (GDP) data for Q3FY18, domestically, the focus in the immediate near term will be on the passage of the budget in Parliament, the goods and services tax (GST) council meeting, implementation of e-way bills, as well as advance tax collection figures expected by mid-March.

“Globally, all eyes will be on the new Fed chairman’s decision on interest rate hikes. Stronger outlook for economic growth in US has raised the likelihood that further policy firming is on the way. Global yields as well as oil prices will also be continuously watched out for," she said.

India saw a GDP growth of 7.2% in September-December of 2017-18, the fastest in five quarters, while fiscal deficit as of January end was at 113.7% of revised estimates. GDP growth was driven by stellar expansion in investment, although growth in private consumption demand moderated. “Overall, the data are a positive surprise and confirm a cyclical recovery. However, we find aspects of the sectoral data puzzling, especially the sharp pick-up in agriculture," Nomura Holdings Inc. said in a report on 28 February.

It said the GDP data confirm a recovery, but the FY18 gross value added (GVA) growth estimate of 6.4% is lower than RBI’s projection of 6.6% and renewed banking sector concerns are a risk to the investment cycle. “We expect RBI to stay on hold through 2018, but risks are biased towards tightening, especially owing to government policies tilting towards raising food price inflation," Nomura added.

Edelweiss Securities Ltd expects the recovery to sustain.

“However, government spending is likely to slow down and export weakness is worrying. Overall, we expect GVA growth to be 7% plus in ensuing quarters," it said in a report on 28 February.

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