BSE Sensex and NSE Nifty close lower on Thursday. Photo: Mint
BSE Sensex and NSE Nifty close lower on Thursday. Photo: Mint

Fed effect: Sensex, Nifty drop almost 1% before ending flat, rupee falls 0.8%

BSE Sensex closes lower by 30 points, or 0.09%, to 32,370, while the Nifty 50 falls 19 points, or 0.19%, to close at 10,122. Here are the latest updates from the markets

Mumbai: Indian stock markets ended little changed after rebounding from early losses on the rupee’s weakness and after the US Federal Reserve outlined plans to shrink its $4.2 trillion balance sheet starting next month and increase interest rates by the year-end.

Both benchmark indices, the BSE’s Sensex and the National Stock Exchange’s Nifty, fell close to 1% in intraday trading but recouped losses later, led by a rally in healthcare stocks. The Sensex closed at 32,370.04 points, down 0.09%, and the Nifty ended 0.19 lower at 10,121.90 points.

Pharmaceutical stocks rose, with the BSE Healthcare index gaining 2.7%.

The rupee sank as much as 0.9%, the most since 18 May, to 64.84 per dollar, before closing down 0.8% at 64.7950, and 10-year bonds declined to a four-month low.

“Fall in rupee on account of the Fed’s plan to unwind its balance sheet and a rate hike by the end of the year impacted market sentiment," said Vinod Nair, head of research at Geojit Financial Services Ltd. “However, the market gradually recovered from lows as liquidity was driven to export-oriented sectors like IT and pharma stocks to take benefit of dollar and regulatory approvals."

The rupee’s weakness was also on concerns of a widening fiscal deficit after finance minister Arun Jaitley said the government may soon announce measures to revive economic growth.

Global markets were mixed as US Treasury yields spiked after the Fed left interest rates unchanged on Wednesday but signalled it still expects one rate hike by the end of the year despite recent weak US inflation readings. It also lowered its estimated long-term “neutral" interest rate from 3% to 2.75%, reflecting concerns about overall economic vitality. The Fed also said it would begin reducing in October its holdings of US treasury bonds and mortgage-backed securities by initially cutting up to $10 billion each month.

Investors seem to be cautious about prospects for foreign liquidity inflows to India after the Fed begins unwinding a decade of aggressive stimulus. Foreign institutional investors have sold a net Rs69,095.65 crore of stocks in September so far; they have bought Indian equities worth $6.54 billion (around Rs42,185 crore today) this year.

Domestic liquidity should cushion Indian markets, said Unmesh Kulkarni, managing director and senior advisor, head, markets and advisory solutions, at Julius Baer Wealth Advisors (India) Pvt. Ltd.

“Only if the dollar keeps strengthening, then there may be some concerns on foreign liquidity inflow into emerging markets in medium term," he added.

Bloomberg contributed to this story.