After a strong gap-up opening Indian markets were not able to sustain at higher levels and bears re-emerged to drag Sensex and Nifty lower. Sensex had jumped to 53,142 at day’s high and then slumped to 51,642 at day’s low – a gap of over 1,000 points – on the expiry day of weekly derivative contracts. Currently, the benchmark index was down 300 points at 52,237. The Nifty was down 2% to 15.400 levels.
Overnight, Federal Reserve, the US central bank, announced its biggest interest rate hike since 1994 and projected a slowing economy and rising unemployment in the months to come. But analysts say that the 75-basis-point move was already factored in by the market after hot inflation data last week spooked investors.
Wall Street rallied overnight after the Fed’s hike as investors took heart from Chair Jerome Powell’s comments suggesting future rate increases may be more modest. The bigger than usual rate hike also had been anticipated for weeks and came as no surprise.
But European markets slipped today and US futures were lower as investors weighed risks to growth from surging inflation after the Federal Reserve went ahead with the biggest rate increase.
“More than the 75 bps hike in Fed funds rate, which was expected, it was the Fed chief comments and guidance that have calmed the markets – temporarily. Powell’s remark that “we have the tools and resolve to achieve price stability” reflects confidence in containing inflation. His guidance of 3.4 percent rate by end of 2022 and 3.8 percent terminal rate in 2023 reflect the determination to fight inflation. However, the presently unknown factor is whether the rising rates will tip the US economy into recession,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
In India, the sustained FPI selling is an additional headwind for Sensex and Nifty, he added.
“Investors may follow a cautious investment strategy without taking aggressive bets. Take a long-term view and use dips in the market to slowly accumulate fairly priced high quality stocks such as leading banks, leading IT, pharma and select autos,” Vijayakumar said.
Ajit Mishra, vice president Research at Religare Broking, said the short intraday rebound is not likely to lead to a reversal, “unless we see a definite rebound in U.S. markets and only then can we shift to positive bias from the current negative one.”
Mohit Ralhan, Managing Partner at TIW Capital Group, said: “Although Fed expects the inflation to move lower in 2023, the effect of the Fed’s actions on the broader economy remains uncertain. The markets are expected to remain quite volatile as it tries to find the balance between economic growth and high inflation.”
Ramkumar Venkatramani, Lead – Investment Advisory, Kristal.AI, said increase in US rates would make it more attractive for yield seeking investors at the expense of emerging markets. “More importantly, if the Fed’s aggressive action led to a recession in the US, it can quickly spread to other parts of the world, slowing down the global growth rates,” he added.