Indian stock markets vs US Fed: How to play the faceoff

Indian shares today in reaction to Fed's hawkish stance after the US central bank raised interest rates and indicated it would raise rate more often than markets had expected. The Nifty was flat in afternoon trade after being down over 1% earlier in the session. Overnight, the Fed increased rates by 75 basis points on Wednesday – the third such rise in a row, triggering a selloff in other markets.

The big question from the Indian market perspective is whether India’s outperformance will continue in the present global risk off context, says VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services. "Investors can remain optimistic but be cautious since India’s valuations are on the higher side. Financials, capital goods, select autos, telecom and construction related stocks can be bought on declines," he said.

“While the Fed’s 75bp rate hike and reiteration of the hawkish message were on expected lines, indication that the terminal rate is likely to be 4.6% was higher than market expectations. US 10-year bond yield spiking above 3.5% and the dollar index above 111 are unnerving for equity markets. Now the market feels that the probability of a US recession has increased to 75%. In the backdrop of sharply slowing Eurozone and China, this is bad news for global growth,” he added.

The Indian rupee hit a record low of 80.56 as the dollar surged on the Federal Reserve sharply hiking rates and maintaining a stance that is more hawkish than expected.

"The market is seeing more of a specific stock related move rather than tracking the benchmark index," said Ajit Mishra, vice president - Research, Religare Broking Ltd, adding that FMCG and auto stocks were moving on expectations of good festive season sales.

The FMCG index was up 1.5% with ITC hitting a 5-year high. Foreign investors purchased a net $1.4 billion worth of Indian equities so far this month as of last close, compared with a net $6.44 billion worth of equities in August.

"While the rebound in foreign investor buying is acting as a cushion for markets, the upside remains capped due to weak global cues," said Mishra.

Trideep Bhattacharya, CIO Equities, Edelweiss MF, said rising interest rates represent a headwind for Indian equities but “our buoyant domestic demand scenario presents a sliver of hope for global investors looking to diversify globally.”

“We remain constructive on Indian equities over the medium-term and continue to orient our portfolios around domestic cyclical which continue to look attractive to us from a medium-term perspective.” 

US stock index futures were steady today after a sharp selloff on Wall Street in the previous session. 

“Post the Fed policy announcement, markets remained volatile. Given the fact that markets were factoring most of the announcements, the immediate impact from the announcements was limited. However, going forward, it will be important to see how the aggressive pace of tightening helps in curbing inflation along with its impact on growth, job growth and global currencies,” said Vivek Goel, Co-founder and Joint Managing Director of Tailwind Financial Service, a wealth management platform. 

(With Agency Inputs)