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PremiumUS Federal Reserve continues on its path of achieving maximum employment and an inflation rate of 2%. Accordingly, the central bank led by chair Jerome Powell has raised the target range for the federal funds rate to 5 to 5-1/4 percent. However, FOMC said, it is prepared to adjust the stance of monetary policy as appropriate if risks emerge. For further rate hikes, chair Jerome Powell the Fed will take a data-depended approach to determine the rate decisions ahead. He believes the US banks are sound and resilient.
Markets break eighth days rally on Wednesday. Sensex dips below the 61,200 mark to end at 61,193.30 down by 161.41 points or 0.26%. Nifty 50 slipped below psychological 18,100 level to close at 18,089.85 down by 57.80 points or 0.32%.
Vinod Nair, Head of Research at Geojit Financial Services said, "winning streak of the domestic market was disturbed by adverse headwinds from the US market. Renewed concerns over the US regional banking turmoil, uncertainty regarding the Fed's policy outcome, and the need to increase the US treasury debt borrowing limit triggered a bearish attack on Wall Street. Despite this, the robust growth of India’s services and manufacturing sectors in April and the strong inflow of foreign funds helped minimise the losses in the domestic market."
Indian rupee closed at 81.8175 against US dollar on Wednesday.
On the performance, Jateen Trivedi, VP Research Analyst at LKP Securities said:
Rupee traded in a small range between 81.75-81.85 as participants await the outcome of the FED's interest rate decision. As the interest rate is now at 5.00% it becomes very important here on what FED's committee looks at the scenario of battling inflation. Any hint at even higher rates from here on will see the rupee falling below 82.25 strongly and the trend of weakness can resume. On the flip side any dovish hints will support the rising rupee momentum further beyond 81.50. Crude has played a supportive role in the recent rupee rally along with FII's being in buying mode. Rupee range will be seen breaking on either side from the tight range of 81.70-82.00 which has been seen in the last one week or so.
Oil prices plunge for the second consecutive day. Brent crude dipped by 2.3% to trade at $73.66 per barrel. Similarly, US WTI dived 2.4% to trade at $69.96 per barrel. Prospects of the US recession have triggered concerns over fuel demand. The Fed is also expected to hike the rate which is likely to weigh on the demand outlook.
Apurva Sheth, Head of Markets Perspective & Research, Samco Securities:
The market is discounting a 25 bps hike by the US Fed tonight. However, we believe there are high chances that the Fed may throw in a surprise with a pause in their policy meet. This may be simply because, the gap between their interest rates and inflation has narrowed down to zero. Along with this, the banking crisis has deepened with First Republic Bank failure. The Fed wouldn't want to risk financial stability just when inflation is already headed lower.
Cryptocurrencies like Bitcoin, Ethereum, BNB, XRP and Cardano are currently trading in red. This market is cautious ahead of Fed policy.
CoinDCX said, "Crypto markets face downtrend ahead of the Federal Reserve's interest rate decision scheduled on 3rd May with expectations around the market betting on this being the last hike. The markets will be waiting for Fed Chair Jerome Powell's press conference for clues on future moves. According to CME data, futures markets have a high probability of a 25-bps hike, with an 89% certainty. As a result, the U.S. dollar faces key strength this week, with the U.S. Dollar Index (DXY) challenging its highest levels since mid-April."
Divam Sharma- Founder at Green Portfolio PMS on the Fed rate hike said:
As of today, there is a 90% probability of a 0.25% rate hike while a 10% probability of a pause. The economic data announcements around CPI inflation look comfortable while unemployment which is a lagging indicator is still reflecting strength. The GDP growth had slowed down in Q1 and has increased the claims for US economic recession.
We are also continuing to see stress in the US banking system with names like PacWest Bancorp, Western Alliance Bancorporation, Metropolitan Bank Holding Corp, and Homestreet Inc correcting 15-25% in yesterday’s trade.
The inflation continues to remain sticky while the room with Fed to fight it with rate hikes is very less. We also have elections coming up in the US in 2024 and a recession would be the last thing the Democrats would want.
We believe that like the RBI, the Fed will also take a pause this time with a wait-and-watch stance.
Shrey Jain, founder and CEO of SAS Online underscored that the decision to either hike or pause the interest rates can have significant repercussions, leading to notable fluctuations in the market.
Jain said if the central bank decides to hike rates, it signals a tightening of monetary policy, which can impact borrowing costs, consumer spending, and business investments. This, in turn, may lead to a decrease in economic activity, lower stock prices, and increased volatility in the financial markets.
On the other hand, if the central bank decides to pause the rate hike, which is less likely to happen, it suggests a more accommodative stance towards monetary policy. This can potentially stimulate economic growth, boost investor confidence, and drive stock prices higher.
The Reserve Bank of India (RBI) kept its key repo rate steady in its April policy meet after six consecutive hikes, saying it was closely monitoring the impact of recent global financial turbulence. However, RBI said its policy stance remains focused on "withdrawal of accommodation", signalling it could consider further rate hikes if necessary. Read more.
A 25 bps rate hike is unlikely to have a significant impact on the Indian market since it is already factored in. However, the Indian stock market is sensitive to global events and the impact of a Fed rate hike on the Indian market can be complex. Read more
US Fed may take a pause after the May meet. Global financial firm Nomura expects the May rate hike to be the last in the current hiking cycle, and the first rate cut to take place in March 2024.
On the other hand, ING expects a 100 bps rate cut from Fed in the current year. It forecasts a 50 bps rate cut each in November and December FOMC meetings.
Apurva Sheth, Head of Markets Perspective & Research at Samco Securities said while the market is discounting a 25 bps hike by the US Fed tonight, there are high chances that the Fed may throw in a surprise with a pause in their policy meet. This may be simply because the gap between their interest rates and inflation has narrowed down to zero. Along with this, the banking crisis has deepened with First Republic Bank's failure. The Fed wouldn't want to risk financial stability just when inflation is already headed lower.
