Sharp Fed rate hike jolts stocks
Demand slowdown and recession fears grip investors across the world
MUMBAI: Indian stocks tumbled more than 2% on Thursday as recession fears resurfaced with major central banks raising interest rates aggressively to contain persistent inflationary pressures.
Benchmark indices opened in the green but lost momentum as European markets opened and soon slipped into losses. The Sensex and the Nifty indices fell 2.12% and 2.28%, respectively, from their intraday high on Thursday to close at 51,495.79 and 15,360.30. So far this week, the Sensex and the Nifty have lost 5.17% and 5.19%, wiping out ₹12 lakh crore worth of investor wealth.
“Global markets slumped during the day over recessionary fears after the US Fed raised interest rates by 75bps, the biggest increase since 1994. Further, Fed chair Jerome Powell signalled another big move (50-75 bps hike) next month, intensifying its fight to contain rampant inflation. It has sharply raised interest rate target to 3.4% for 2022 and 3.8% for 2023,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services Ltd.
Khemka added that markets are likely to remain under pressure amid worry over a significant economic slowdown, while the slow progress of the monsoon might delay the sowing of summer crops, fuelling food inflation.
Analysts expect the latest Fed rate action to prompt foreign portfolio investors to flee risky emerging markets such as India, keeping the rupee under pressure. So far this year, they have sold Indian equities worth ₹1.96 lakh crore, or $25.7 billion, data show, while domestic institutional investors have bought equities worth ₹1.85 lakh crore.
“This would mean two things for India. First, the investment flows will be impeded further, with higher interest rates making the US markets more attractive than EMS. Second, currency volatility will be here to stay and the rupee will move down,” said Madan Sabnavis, chief economist, Bank of Baroda.
“The extent will depend on how RBI manages the same. So far, the rupee has depreciated at about the median rate and is hence not out of sync with what is happening to other currencies. But our monetary policy will largely be driven by domestic inflation trajectory while keeping an eye on the fallout of Fed rate hikes,” Sabnavis added.
Analysts at UBS expect the rupee to weaken to 80 against the dollar in three months. “Our EM strategist expects the INR to weaken to 80 against the USD in the next three months, with risks skewed to the upside,” UBS noted in a report on Thursday.
The rupee closed at 78.08 against the dollar on Thursday, marginally weaker than its previous close of 78.07, while the yields on the 10-year government bonds inched up 3bps to 7.62%.
“An aggressive US hike cycle puts considerable pressure on the Asian central banks to follow suit, as their policy dashboard broadens from being focused on domestic growth and inflation path, to also include financial stability and outflow risks. The need to anchor domestic inflationary expectations and to preserve financial market stability is likely to nudge regional central banks to undertake timely and front-loaded action even if they don’t seek to match the quantum or pace of the US hike cycle,” said Radhika Rao, senior economist and executive director at DBS Bank.
Marzban Irani, chief investment officer of LIC Mutual Fund, said the current global situation might force RBI to consider an intermittent rate hike ahead of the next policy meeting in August.
“There may be an intermittent hike by RBI in July. We may have to hike rates in tandem with US Fed, or else it may affect our currency. We do not want to import inflation at this time. Monsoon may remain uncertain, and if oil continues to remain above $120/ bbl, then inflation might remain high,” he said.
To be sure, some experts said the 75bpjs rate hike by the Fed may not spur near-term action by the RBI, but another large hike in the next Fed meeting could make the Indian central bank look at another 50bps hike.