The domestic equity and currency markets dropped along with their emerging market peers after the US Federal Reserve cut interest rates but said the move was not the start of a long-running rate-cut cycle. The comments saw the bond yield and the dollar rise, triggering risk-aversion among investors. The benchmark Sensex fell as much as 787 points, or 2.1 per cent, in intra-day trade before recouping some of the losses, helped by short-covering and a rebound in shares of Reliance Industries, the country’s second most valued company.
Both the indices closed at their lowest level in five months. The rupee ended at one-month low of 69.06, down 0.38 per cent — most since May 23 — over the previous day’s close of 68.8 against the dollar.
Most EM currencies weakened against the greenback, with the South African rand and the Indonesian rupiah dropping 0.9 per cent and 0.7 per cent, respectively.
On Wednesday, the Fed cut interest rates by 25 basis points and said the rate cut was a mid-cycle adjustment to policy. Market players said the comments made by Fed Chairman Jerome Powell were confusing.“Sentiment is quite negative at the moment. It’s a bit confusing what Fed Chair wants to do,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.
The hawkish stance by the Fed couldn’t have come at a worse time for the Indian markets, which have hit a downward slope since the Union Budget on July 5. The benchmark indices have corrected close to 6 per cent in one month amid a sharp selloff by foreign portfolio investors (FPIs).
A lack of stimulus to prop up the economy, increase in income-tax surcharge on FPIs, and taxes on buybacks announced in the Budget have disappointed investors. FPIs have sold shares worth nearly Rs 14,000 crore in the past one month.