The US Federal Reserve increased the funds target range by a tiny 25 basis points on Wednesday, to a 16-year high of 5–6.25%, amid signs that the rate hikes may be drawing to an end after hiking interest rates aggressively to control inflation.
For the Indian equities markets and the economy overall, it would be positive if the Fed, which last year caused rate hikes around the world, took a break during the next policy review in June and dropped rates in July.
Following the Fed’s action, the BSE Sensex increased by 556 points, or 0.91%, to close at 61,749.25 on Thursday.
It appeared that the Fed was attempting to get the markets ready for a halt in June based on the language of the statement and the tone of the press conference by the US central bank. The current rate environment appears to be appropriately constraining. The Fed said it is not firmly committed to tightening aggressively from the current levels and is more likely to pursue a data-dependent, meeting-by-meeting strategy.
While several members viewed the possibility of the US debt ceiling not being raised by Congress as a potential risk, Fed Chair Jerome Powell stated that he saw moderate growth, not recession, as the baseline scenario for the economy. “The process of bringing inflation down still has a long way to go, and the Fed would contemplate rate reduction if growth was below trend and there were signs of lower inflation. These comments imply that the Fed is signalling a high hold for some time, according to IFA Global Research.
While stating that they “no longer anticipate” further rate increases, the Fed Chair also stated that no action could be “ruled out” if new risks materialise.
From the standpoint of the markets, the Fed chief’s statement that “the case of avoiding a recession is more likely than having a recession” is more significant than the anticipated dovish rate hike. The Bureau of Labour Statistics reported this month that US inflation dropped from 6% in February to 5% for the twelve months that ended in March.
According to Hemang Jani, head of equity strategy, broking & distribution at Motilal Oswal, the Fed’s last rate rise appears to be its final one. Rate decreases would only take place in the event of a material decline in economic activity or a slowdown in inflation.
Analysts have cautioned that further increases will exacerbate the pressure on consumer lending and increase credit delinquencies. According to Sunil Damania, Chief Investment Officer at MarketsMojo, “We believe that this will be the Fed’s final rate hike for the year and that there is a strong likelihood that the Fed will start lowering interest rates in the second half of 2023.”
Given the health of the US banking sector at the moment, analysts indicated they preferred that the Fed refrain from raising interest rates. PacWest Bank is having issues as a result of Silicon Valley Bank and First Republic failing. The recent rate increase is probably going to make things more difficult. Additionally, the commercial real estate market in the US might experience difficulties.
In addition, indications from the US, the world’s largest consumer market, indicate that consumer confidence is deteriorating even among higher income groups, credit delinquencies are going up, and there is a possibility that unemployment will grow even faster.
Investors have interpreted the Fed’s remarks as a potential halt or perhaps a pivot in the next assessment. According to Bank of Baroda Chief Economist Madan Sabnavis, there is a 52% possibility that rates would be lowered in July. Given that the RBI has halted rate increases and that the price of crude oil is declining, the most recent Fed boost may not have a significant effect on India.
With little volatility, domestic markets are anticipated to continue to be robust. The probability of a soft landing for the US economy is advantageous for the IT sector, which has been struggling due to worries about subpar US orders. The market will be strengthened by the strong rupee and the ongoing purchases made by foreign institutional investors (FIIs).
“High-frequency data show an expanding economy in India with stable profit expectations. According to V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the dramatic decrease in petroleum is a benefit for the overall economy and favourable for industries like paints, adhesives, and tyres.
Capital inflows are anticipated to increase if the Fed decides to decrease rates later in the year. FIIs have already begun investing in India, with inflows of Rs 8,243 crore so far in May after reaching Rs 13,545 crore in April. Markets are anticipated to gain significantly if the Fed begins lowering rates in July 2023. The bottom line is to keep investing and carefully build up your stock portfolio.
The RBI is currently awaiting the results of its recent 12-month initiatives, which are still being felt. Since May 2022, the RBI has raised the policy rate (Repo), which is still affecting the market, by a total of 250 basis points to 6.5%. Lending and deposit rates have increased by the banks. Borrowers will benefit from the RBI’s decision to hold off on changing the April policy since it would prevent an increase in the external benchmark-based lending rate (EBLR), which is correlated with the repo rate. When inflation slows, lending rates will decrease.
There is a belief in the market that the RBI is unlikely to pursue more rate hikes in light of the likelihood that inflation will trend lower from 5.66% in March to 6.44% in February.
Although the central bank anticipates retail inflation to decline to 5.2% in 2023–2024, if it falls below 5%, the market can anticipate interest rate reductions, which will boost sentiment.