As the US Federal Reserve expressed apprehensions on the need for rate cuts in the future, highlighting recent signs of strength in the economy, it may not be good news for emerging markets like India. The US central bank lowered the target range for its key interest rates by 25 basis points to between 1.75% and 2%, with Chairman Jerome Powell saying the “moderate" policy moves should be sufficient to sustain the US expansion.
It also signalled a higher bar to further reductions in borrowing costs, eliciting a fast and sharp rebuke from President Donald Trump.
Fed Chair Jerome Powell, however, later said if the US economy weakens, the central bank would lower rates further.
Higher interest rates in the US typically lead to outflow of foreign funds from emerging markets, considered to be riskier assets, while in case of lower interest rates in the US, there are inflows to emerging markets.
In the current situation, with stock markets under stress because of a limping global economy, flight of foreign funds to Indian equities would be a boost. Foreign institutional investors (FIIs), who bought $9.4 billion of Indian equities till July went into an aggressive sell-off mode following higher tax proposals in the Union Budget for FY20 which was later rolled back. The Union budget had raised surcharge on the ultra-rich that was also applicable to some FIIs.
Since July, FIIs have sold Indian shares worth $2.82 billion, but have remained net buyers with $6.59 billion in the year so far.
A host of events dented foreign investors’ confidence, despite easy monetary policies followed abroad, low and falling interest rates globally, and low political risks in India, according to Deepak Jasani, head of retail research, HDFC Securities.
“These include an increase in the tax on super rich/foreign portfolio investors (FPIs) in the Union budget, poor to mixed corporate earnings, overhang on economic growth locally, the US-China trade war and its expected impact on global growth. These outflows could continue as long as the view of FPIs on emerging economies is not sanguine and they are not convinced about economic growth picking up in India over the next one-two quarters," Jasani had said in August.
Domestic institutional investors have been net buyers of Indian shares worth ₹41257.87 crore in 2019 so far. Liquidity is critical to maintain buoyancy in the stock markets.
At 10:23 am, the BSE Sensex was at 36,281.21, down 282.67 points or 0.77%, while the 50-stock Nifty was at 10,757.05, down 83.60 points or 0.77%.
"Equity markets globally face challenging times given the trade war tensions. In this scenario, if Government can successfully generate an economic recovery and stop earnings downgrades, Indian equities have the potential to do well and be les impacted by global risks," said Rahul Singh, CIO-Equities, Tata Mutual Fund.