The US Federal Reserve held the policy rate unchanged at 5.25-5.5% on Wednesday (20 September), in line with market forecasts. It did, however, predict a probable 25 basis point (bps) increase in interest rates by the end of this year, as well as a 50 bps decrease by the end of 2024.
This put downward pressure on global markets, including India, where the Sensex and Nifty fell 570.6 points and 159 points, respectively, on Thursday. The Sensex has dropped 1,366 points, or 2%, in the last two trading sessions.
The US Federal Reserve raised its estimate for 2023 real GDP growth to 2.1% from 1% in June. It also predicts that inflation will be 3.3% in 2023 and 2.5% in 2024.
“We are prepared to raise rates further if necessary, and we intend to maintain policy at a restrictive level until we are confident that inflation is moving down sustainably towards our target,” said Federal Open Market Committee Chairman Jerome Powell.
The US Fed expects interest rates to fall by 50 basis points in 2024, compared to the 100 basis points anticipated in its June decision.
“The Committee aims to achieve maximum employment and 2% inflation in the long run.” In support of these objectives, the Committee decided to keep the federal funds rate target range at 5.25 to 5.5%,” the Federal Reserve stated in a statement.
The Committee will consider the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments in determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, according to the Fed.
“This time, the Fed has signalled to markets that higher interest rates are the new normal.” They have made it quite apparent that higher interest rates for an extended period of time are here to stay,” said Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund.
The US Federal Reserve’s hawkish pause influenced market sentiment. Twelve of the 19 Fed officials polled predicted that interest rates would rise again in calendar year 2023. As a result, the expectation of some liquidity tightening influenced the equities market outlook, according to a note from Bank of Baroda.
On Thursday, the domestic share market experienced selling pressure, mirroring that of its overseas counterparts. While the 30-share BSE Sensex fell 0.85% to 66,230.24, the NSE’s Nifty fell 0.8% to 19,742.35.
“Bearish sentiment across global equities led to selling in the domestic market for the third straight session as investors fretted over the US Fed statement indicating one more rate hike later this year,” said Shrikant Chouhan, head of retail research at Kotak Securities Ltd.
Other factors contributing to the decline included persistent overseas capital withdrawals, rising US dollar index and government yields, and higher crude oil prices, which made investors nervous.
The RBI has always said that its interest rate choices are guided by the domestic inflation picture and are not influenced by the activities of the US Fed.