BackFed’s hawkish pivot to tame inflation may hit FII flows
However, the upcoming US bond purchase tapering and subsequent rate hikes may strain future fund flows into India.
PremiumIndian markets remained subdued on Thursday even as the US Federal Reserve turned hawkish on inflation, given wide expectations about the move and support from firm global cues. However, the upcoming US bond purchase tapering and subsequent rate hikes may strain future fund flows into India.
The BSE Sensex rose 113.11 points, or 0.20%, to 57,901.14, while the Nifty gained 27 points, or 0.16%, to 17,248.40. Other Asian markets closed mostly higher, with Japan’s Nikkei, South Korea’s Kospi and China’s Shanghai composite rising 2.13%, 0.57% and 0.75%, respectively.
“Global cues turned positive despite the hawkish statement from the US Fed, as investors turned optimistic that the Fed policy tightening will help fight inflation without derailing economic growth. Investors shrugged off the risk of new covid restrictions, focusing instead on the prospect of more reassurances from central banks. ECB, in its policy meeting, is also poised to unveil a gradual withdrawal from the stimulus in the face of high inflation," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services Ltd.
Though global cues have turned positive after the big event of Fed policy, continued FII selling, absence of any positive trigger and strong action in the primary market are likely to continue, putting pressure on the secondary market, Khemka said.
The Fed said it would end its pandemic-era bond purchases in March and pave the way for a three quarter-percentage-points of interest rate hikes by the end of 2022 as the economy nears full employment and the US central bank copes with a surge of inflation.
Due to rising prices and strong employment, Fed officials projected its benchmark overnight interest rate would need to rise from current near-zero level to 0.90% by end 2022. That would require a rate hike cycle that would see the policy rate climb to 1.6% in 2023 and 2.1% in 2024 - still considered loose by most estimates.
According to Arvind Chari, chief investment officer at Quantum Advisors, the biggest risk for Indian markets will be the Fed reducing its balance sheet size. “This means the Fed will be taking liquidity away. The fact that this was discussed in the December FOMC meeting suggests that if conditions persist, Fed may not only hike rates but also begin allowing bonds that it holds to mature and/or selling bonds to reduce the size of its balance sheet," he said.
Reuters contributed to the story.
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