Stocks cheer Fed stance on rates
US Fed chair Powel’s comments have led markets to believe that the peak in interest rate is near and the Fed could cool rate hikes.
PremiumIndian benchmark indices Sensex and Nifty gained 1.87% and 1.73% respectively on Thursday as investors breathed a sigh of relief over rate hikes by the US Federal Reserve (75 bps) coming in line with expectations. A less hawkish stance of the US FED added to investor optimism.
US Fed chair Powel’s comments have led markets to believe that the peak in interest rate is near and the Fed could cool rate hikes. investors also are seeing some light at the end of the Fed tightening tunnel, analysts said.
Powel maintained a strong focus on getting inflation back, however, experts said that the markets have taken comfort from the fact that the Fed’s statement was more balanced this time and the Fed is turning increasingly attentive to growth risks as well.
BofA Securities said that the key change in the FOMC statement relative to June was the first sentence: “Recent indicators of spending and production have softened." They said that the rate markets viewed the meetings as dovish. Treasury yield fell and Forex markets took the meeting in their stride.
With the US Fed hinting that they are looking to slow the pace of rate hikes in the upcoming meetings, the dollar saw profit-taking, said analysts. Risk-on mood in equity markets also helped the Rupee said Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities. The USDINR spot closed 14 paise lower at 79.75, thanks to the less than hawkish stance of the US Fed, said Bannerjee.
Deepak Jasani, Head of Retail Research at HDFC Securities Ltd said that the US Fed’s comments hint at a possibility of a slower pace of monetary tightening. The market latched on to Powell’s statement that slowing down from the pace of 0.75-percentage-point rate hikes will likely be appropriate “at some point." The market also liked when Powell said the Fed was moving to a new “meeting-to-meeting" phase, perhaps believing that a peak in interest rates is near.
Jasani also highlighted Powel saying the Fed’s program to shrink its balance sheet is working and markets “should be able to absorb this."
The market seems to be taking cue from the Fed chief’s observation that, “ I don’t think we are in a recession now, the labour market continues to be tight. “ said VK Vijaykumar Chief Investment Strategist at Geojit Financial Services. Unemployment at 50-year lows and job vacancies at historical highs, seem to support the Fed chief’s confidence about the US economy, added Vijaykumar
Recession fear in the US and in other parts of the world has already led to a sharp drop in commodity prices which is positive for India. The pickup in monsoon should ease some pressure from the RBI too, analysts said.
Siddhartha Khemka, Head-Retail Research, Motilal Oswal Financial Services said “We expect it to have a positive rub-off on the RBI MPC where the latter might slow down its aggression and hike rates by 25bps in its next MPC."
However, RBI may have to take into consideration various other factors as a weaker rupee, high crude oil prices and so on too
Akhil Mittal, Senior Fund Manager, Tata Mutual Fund said that the case of the magnitude of rate hikes in front of RBI is slightly more complicated by currency considerations, where I believe India will have to be directionally in line with global central banks, while the quantum of action to be suited for our own economy.
With inflation drivers easing, Mittal sees Terminal Repo Rate in the range of 6%-6.25% for now, and a longish period of pause post that. Mittal also believes that the growth situation in India is not as bad as in the west (recessionary expectations rising in the west) and RBI might not be immediately pushed to support growth.
We expect the RBI’s commentary to soften a bit with an acknowledgement that inflation risks are receding, said Pankaj Pathak Fund Manager Quantum Mutual Fund. From the bond market’s perspective, much of this is already priced in as bond yields have fallen by over 25 basis points from their recent peak, added Pathak.
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