Markets see wild swings as traders weigh hawkish Fed, Budget uncertainty

The equity markets witnessed intense volatility on Friday, with the benchmark Nifty dropping over 1.5 per cent from the day’s high amid the hawkish pivot of the US Federal Reserve (Fed) and Union Budget uncertainty. Sustained selling by overseas investors weighed on the markets, which tried to rebound after closing at their lowest level in a month in the previous session.

Global markets also came off their highs as investors digested the fallout of a tighter monetary policy regime.

The Sensex gained as much as 807 points, or 1.4 per cent, in intra-day trade only to give up all the gains to end at 57,200, with a loss of 77 points. The Nifty came off 263 points from day’s high of 17,373 to finish the week at 17,102, down 8 points over previous day’s close.

Both the indices have posted losses in seven of the previous eight sessions and have posted back-to-back weekly losses of 3 per cent each.

Stocks worldwide have tumbled amid a spike in the US bond yield in anticipation of four rate hikes by the US central bank this year. On Thursday, after their two-day policy meeting, Fed officials laid the ground for higher rates, with Chair Jerome Powell saying America’s strong economy may no longer require monetary support.

The US central bank has left rates unchanged at near-zero since March 2020 in a bid to boost the economy battered by the Covid-19 pandemic. The Fed’s ultra-low rates, coupled with its bond-buying programme, have bolstered risky assets like the equity market. Now, its decision to reverse some of these stimulus measures has made investors and equity markets anxious and triggered a flight to safety among foreign portfolio investors (FPIs).

Overseas investors sold shares worth Rs 5,045 crore on Friday, while domestic investors provided buying support of Rs 3,359 crore.

In the past eight trading sessions, FPIs have pulled out close to $8 billion from domestic equities.

“Concerns around inflation, higher bond yields and potential rate hikes have sparked a risk-off globally, leading to elevated FPI outflows. Domestic equities have also borne the brunt of rich valuations after a relentless rally post the bottom in March 20. While the Nifty-50 has corrected just 8 per cent from its October 2021 peak, it is hiding the stress in the broader markets. Concerns around the cost of equities going up have taken a brutal toll on high-growth stocks belonging to the tech domain,” wrote Gautam Duggad, head of research, institutional equities, Motilal Oswal Financial Services, in a note.

The latest events in the market have a resemblance to the 2013 Taper Tantrum episode, when US Treasury yields had surged after the Fed had announced tapering of its quantitative easing programme.

Besides the Fed action, rising global oil prices amid geopolitical tensions has also weighed on the performance of the Indian market. Brent crude futures, the international oil benchmark, has crossed $90 the first time in more than seven years. 

“India being a major importer of crude is usually impacted by upward movement in crude prices which could also impact India’s current account deficit and the rupee,” said Shibani Kurian, Senior EVP & Head-Equity Research, Kotak Mahindra Asset Management Company, last week.

“However, India’s balance of payments position is far stronger today as compared to the situation during the Taper Tantrum. India’s short-term debt as a percentage of forex reserves has declined to 40 per cent (the Taper Tantrum peak of 59 per cent). Forex reserves are tracking near an all-time high of $632 billion. Moreover, import cover at 13.3 times reasserts the robust external balance sheet position.”