US Fed outcome: What next for Indian markets?

Global markets gain ground in a relief rally. Indian benchmarks end lower as banks drag

 

As the US moves closer to hiking interest rates in almost a decade amid downward revisions to its economic and inflation projections, global markets gained ground in a relief rally. 

In its assessment of the economy, the FOMC (Federal Open Market Committee) acknowledged that economic growth has moderated somewhat and export growth has weakened. Inflation, according to FOMC, is anticipated to remain near its recent low level in the near term, but it expects inflation to rise gradually toward 2% over the medium-term as the labour market improves further and the transitory effects of energy price declines and other factors dissipate.

Dow Jones Industrial Average (DJIA) gained 228 points, or 1.28%, while the S&P 500 moved up 30 points, or 1.45%. Gains were also visible in Asian markets with Jakarta Composite, KOSPI, Straits Times and Hang Seng gaining between 0.4% – 1.4%.

Indian markets, too, gained ground in morning deals with the benchmark indices, the S&P BSE Sensex and the CNX Nifty moving up over 1% in intra-day trade. However, profit booking in the second half of the session, especially in the banking stocks, saw the benchmark indices end nearly 0.6% lower.

Explains Deven Choksey, managing director & chief executive, K R Choksey Securities: “The pain is coming from the banks and the public sector banks (PSB’s) are the larger culprits here. There has been a change in the provisioning norms, and as a result, they will have to provision for more (bad debts). This is likely to impact their quarterly performance. Since they also hold a large amount of G-Sec portfolio, if the bond yields remain elevated, it may not benefit the PSU banks despite the fall in interest rates. This has led to unwinding of positions in the banking space.”

“Also, the political situation is becoming messy in every state, which is not giving confidence that the reforms / projects will not see the light of day soon. If the political consensus is not built to clear key reforms, it will create nervousness in the markets,” he adds.

US rate hike outlook

Given the developments, analysts feel that the US Federal Reserve could delay interest rate hike beyond June. For most of the year, the economy will continue to be in deflation, which means that the development of core inflation and inflation expectations will be crucial in convincing the FOMC that inflation will over time return to its 2% target, analysts say. 

“What’s more, the strong dollar is also reducing import prices, exerting downward pressure on core inflation. Therefore, we doubt that the data available in June will make the FOMC ‘reasonably confident’ to hike. Our view that the US Fed will not hike before it has completed its checklist has been expressed in a Q42015 rate hike call since early 2014,” said Philip Marey, a senior US strategist with Rabobank International in a note.

Road ahead for Indian markets

In this backdrop, analysts say the fact that the FOMC has dropped the word ‘patience’ was widely expected; and the markets have known since quite some time that a rate hike is on the cards. All this is factored in and that’s the reason why there is not much of an exuberance in the global markets. 

“The up move seen earlier today was a sigh of relief that the FOMC has not delivered any negative surprises, like specifying a time frame for the hike. As a result, we are seeing a relief rally and not a run-away rally. As things stand, the markets are factoring in all the known elements – both at the domestic and global level. Going ahead, the market movement from here on will be guided by corporate results over the next few months. The Nifty will be range-bound between 8,600 – 9,200 levels,” said U R Bhat, managing director, Dalton Capital Advisors.

Vaibhav Sanghavi, managing director, Ambit Investment Advisors suggests that the markets perceive the statements as dovish and a possibility that the rate hike may get delayed by a few months against the consensus view of June. 

“We think that the US Fed is on course for a hike in interest rates and a few months delay won’t matter much. The Indian markets will be pleased with the outcome, which gives more room to manoeuvre policies accordingly. Indian markets, I believe, are better placed than the emerging market peers to face the rate hike. The Reserve Bank of India (RBI) should stay on course to cut rates further. As regards equity markets, one should brace for move volatility with a positive bias,” he says.