Prospect of US Fed firing on all cylinders spooks Indian markets

The benchmark indices declined for the second day in a row as US bond yields rose amid worries of reduction in the US Federal Reserve’s (Fed’s) $9-trillion balance sheet. Riskier assets corrected after Fed Governor Lael Brainard commented that the central bank would start balance-sheet reduction ‘at a rapid pace’ as soon as next month. Experts said markets are yet to price in such a prospect. 

The benchmark Sensex ended the session at 59,610, with a decline of 566 points, or 0.9 per cent.

The Nifty, on the other hand, ended the session at 17,807 — a drop of 150 points, or 0.8 per cent.

Reports of fresh sanctions against Russia further crushed sentiment. Investors were worried that the growing isolation of Russia from international trade would further disrupt commodity flows. The fresh sanctions include a possible US ban on investment in Russia and the European Union ban on coal imports.

Globally, central banks have prioritised tackling inflation after terming price rise as a transitory phenomenon last year. A combination of supply-side disruptions and geopolitical tensions has led to a rise in commodity prices.

Experts said investors are eyeing the Fed minutes, expected to give insight into the pace of interest-rate hikes and the process of reducing the Fed’s bond holdings, including the Reserve Bank of India’s (RBI’s) rate decision on Friday.

“Weaker global cues led to some weakness in the domestic market, as investor sentiment turned cautious after a more hawkish tone by the Fed. With this development, a sharp movement was seen in the US 10-year bond yields, which crossed 2.6 per cent levels. Since the last monetary policy committee meeting, several factors, such as geopolitics, oil and commodity prices, bond yields, and inflation expectations, have altered. Given the rising commodity prices pushing inflation expectation to the higher side, the RBI’s stance remains critical at this juncture,” said Neeraj Chadawar, head-quantitative equity research, Axis Securities.

The 10-year US bond yield rose 2.63 per cent — its highest level since March 14, 2019.

Overseas investors sold shares worth Rs 2,280 crore, while domestic institutions provided buying support of Rs 623 crore.

The markets have rebound over 13 per cent from their March lows. The sharp rebound has come despite the shock created by a spike in oil prices.

“Indian stocks have held up remarkably well despite rise in oil prices, possibly due to shift in current account funding to foreign direct investment, making oil impact linear rather than non-linear, allowing greater flexibility in domestic policy, falling intensity of oil in gross domestic product, cheaper oil sourcing, positive domestic politics reinforcing the government’s thrust on lifting corporate profits, high relative real policy rates, a new profit cycle, structural domestic bid on equities, and growing positivity of multinational companies towards India,” said a note by Morgan Stanley.

The market breadth was positive, with 2,142 stocks advancing and 1,277 declining. A round of 183 stocks hit their 52-week highs. Two-thirds of Sensex stocks ended the session with losses. HDFC Bank and HDFC declined 3.5 and 3.3 per cent, respectively. HDFC twins were the worst-performing index stock and the biggest drag on the indices. Finance declined the most, and its sectoral index fell 1.25 per cent.