Constituent policy

Indices swing wildly after US Federal Reserve and RBI rate hikes

It was a roller coaster ride for benchmarks on Thursday as investors digested decisions by the Reserve Bank of India (RBI) and the US Federal Reserve to raise interest rates to combat the surge in inflation.

Several stocks saw sharp swings as investors weighed the impact of aggressive monetary policy tightening on economic growth and corporate earnings.

After rising 3% in US markets, the benchmark Sensex index rose nearly 900 points in early trading on Thursday. However, the selling of the index heavyweights in the second half of the session saw the index give up almost all of the gains.

The Sensex ended the session at 55,702, with a gain of 33 points or 0.06%. The Nifty ended the session at 16,682, a gain of 5 points or 0.03%. Both indexes had posted their worst fall in two months on Tuesday after the RBI’s surprise 40 basis point rate hike.

Foreign portfolio investors (REITs) sold shares worth Rs 2,075 crore, while domestic institutions were buyers worth Rs 2,229 crore.

Sentiment was also hit as the US futures market pointed to a weak open on Wall Street on Thursday as inflation fears resurfaced. The S&P500 jumped 3% on Wednesday after US Federal Reserve Chairman Jerome Powell quashed rumors that the US Fed was considering a 75 basis point rate hike in the coming months.

The US Fed raised interest rates by 50 basis points for the first time since 2000 and signaled it may take similar action in the next two meetings. The US central bank also unveiled its intention to reduce its balance sheet. However, Powell’s comments that the Federal Open Market Committee was not actively considering a 75 basis point hike sparked a relief rally.

“The Federal Reserve rate hike was in line with expectations. And the president’s statement allays fears of a bigger rate hike. Therefore, the impact on equities will not be very serious. On the other hand, the RBI rate hike announcement was not expected. The communication on the future course of action is a bit ambiguous, which shook the markets on Wednesday,” said UR Bhat, co-founder of Alphaniti Fintech.

Andrew Holland, managing director of Avendus Capital, said investors will need to be prepared for more volatility. “The tightening will start in June. The impact of this will begin in July-September. All intended consequences will begin to appear in September. The Bank of England says the economy could contract next year, and it continues to raise rates. This is where the problem lies now.

Rising crude oil prices also affected investor confidence in India. Crude oil prices rose over the past two days after the European Union announced plans to phase out imports of Russian oil in six months. Brent crude was trading at $113 at 7:00 p.m. IST Thursday, a gain of 2.75%.

Going forward, analysts said global earnings and indices will determine the trajectory of the markets.

“With one of the major global events (Fed rate hike) now behind, markets should see some stability over the next few weeks. Despite the ongoing Russian-Ukrainian war, tight liquidity and market disruptions supply chain, the market traded in a wider range. Domestic equities would continue to track global developments outside of the ongoing earnings season for other indices,” said Siddhartha Khemka, head of Retail Research, Motilal Oswal Financial Services.

Some analysts have said that the current earnings season will not be bad as commodity prices started to rise in February. They expect pressure on margins amid a surge in prices for Brent crude and other commodities to be reflected in June quarter results.

Market breadth was weak on Thursday, with 1,899 shares down and 1,448 up. More than half of the stocks in the index fell. IndusInd Bank fell the most among Sensex constituents at 4.32%, followed by Nestle, which fell 2.8%. The BSE IT index gained the most at 1.8%, while BSE Realty fell 1.6%.

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