Tag: market outlook

A 75 basis points rate hike by the US Federal Reserve (Fed) in the November 1-2 policy review is the consensus view and stock markets globally seem to be baking in the same. What makes the event important is hope among market participants that the Fed could signal a slowdown in the pace of rate hikes in future.

That optimism partly explains the biggest monthly percentage gain that Dow Jones made in October since January 1976, despite many earnings disappointments in the US. For India too, October ended up with a strong 5.8 per cent gain for Sensex, which was doubled the average return of 2.62 per cent the 30-pack index registered in the previous 10 years. 

75 bps rate hike a given

Nomura said markets are pricing over a 90 per cent probability of a 75 bps point hike but “in terms of the December FOMC meeting and beyond, a renewed divide between the hawks and doves is emerging.” 

From the domestic market perspective, the US inflation (and the Fed’s ultra-hawkish stance) is the elephant in the room, said VK Vijayakumar of Geojit Financial Services. 

Vijayakumar noted that US inflation at 8.2 per cent in September continued to surprise on the upside and that the Fed has no alternative but to continue monetary tightening to tame inflation. 

Impact of rate hike

As far as the market impact is concerned, a 75 basis points hike may at most impact the market for a day or two. 

“If the Fed hikes the rate by 75 bps, I don’t expect a significant negative impact on the Indian market. In fact, after every 75 bps rate hike (June July & September), the Indian market recovered losses easily. I expect a similar trend to play out. A US Fed rate hike could impact Indian market sentiment only for a day or two,” said Viraj Vyas of Ashika Group. 

But to say Fed rate hike may not pinch Dalal Street going ahead is incorrect. 

The further US Fed tightening may hurt the world’s largest economy. Just last week, the first advanced for the September quarter suggests a growth for the US  economy after two quarters of contraction. 

PhillipCapital said the effect of tightening on growth is normally seen with a two-three quarters of lag. A sharper rate hike in the current tightening cycle may tamper growth sooner, it said in a note.

Since March, Fed has hiked the policy rate by 300 basis points cumulatively. That pushed the Dollar index higher and, as a result, sent the rupee tumbling to a record low.

A weak rupee increases oil import bill for India and stoke inflation. It also leads to foreign outflows. In 2022 alone, foreign portfolio investors have sold domestic stocks to the tune of Rs 1,61,881 crore. 

The policy moves in the US and globally also pushed the RBI to raise the policy rate by 190 basis points since May. Just a day after Fed policy decision, the RBI will hold an additional policy meet on November 3.

All eyes on Fed commentary

Nomura said the Fed Committee may begin a more intensive debate about whether and how to downshift to 50 bps hikes. 

While the Fed Chair Jerome Powell will likely repeat that the Fed will eventually slow the pace of rate hikes, Nomura does not expect a commitment to do so even at the December meeting.

“Additional data, including two more CPI and NFP reports, will likely prompt Powell to keep the Committee’s options open. Moreover, there does not yet appear to be a consensus on the Committee about the preferred size of a December hike, limiting Powell’s ability to offer guidance. Incoming price and wage inflation data suggest the Fed has made little progress on its inflation efforts,” it said. 

Nomura said committing to slow the pace of rate hikes in December could result in easier financial conditions and work against the Fed’s objectives.

What if Fed gives a dovish signal?

A dovish signal could be an exciting moment for equity investors, one they’ve craved all year, said Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA. 

“But that doesn’t mean it’ll be plain sailing from here. There’s still the economic drop-off and potential global recession to contend with, not to mention a highly uncertain winter in Europe,” Erlam said.

Nifty performance in recessions

Among past instances, PhillipCapital said, Nifty fell to 900 level by September 2001 from 1,350 level in February 2001 during the dot-com recession. It recovered to 1,350 level by September 2003.

During the global financial crisis, Nifty fell to 2,550 level in October 2008 from 6,150 level in December 2007, only to recover to 6,150 by October 2010.

During the Covid-led recession, Nifty plunged to 7,600 by March 2020 from 12,100 in February 2020. It recovered to pre-covid levels by November 2020. 

“Nifty recovered from the dot-com fall in 24-months; it recovered from the GFC recession in 23 months, and from Covid recession in 8 months,” PhillipCapital noted. 

Phillip Capital has a neutral stance on Indian equities, as it finds global monetary tightening and earnings slowdown as key risks.

“In case global slowdown is avoided, India equities will trend higher. However, until that clarity emerges, we expect Nifty to be range-bound. We retain our March 2023-September 2023 target at 17,800-18,800. While we expect India’s outperformance to sustain, near term trends will likely be soft owing to higher interest rates, tight liquidity, weakening rupee, pent-up demand in FY22/23, and slowing global growth,” it said on Monday.

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