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After aggressively raising interest rates to tame inflation, the US Federal Reserve on Wednesday raised the funds’ target range by 25 basis points smaller – to a 16-year high of 5-5.25 per cent – amid indications that rate hikes may be reaching an end level.
If the Fed, which triggered interest rate hikes around the world last year, pauses its next policy review in June and cuts rates in July, that will be good news for Indian stock markets and the economy in general.
The BSE Sensex rose 556 points, or 0.91%, to close at 61,749.25 Thursday following the Fed’s move.
What’s the latest tip on the rise?
From the language of the statement and the tone of the US central bank press conference, it appears that the Fed was trying to prepare the markets for a pause in June. It now appears that pricing is in a sufficiently restrictive area. The Fed has indicated that it is likely to adopt a meeting-by-date, data-driven approach and is not pre-committed to tightening aggressively from current levels.
Federal Reserve Chairman Jerome Powell said he saw moderate growth, not recession, as the base condition of the economy, while many members saw Congress’ failure to raise the US debt ceiling as a potential risk. “The process of deinflation still has a long way to go and declining trend growth and signs of lower inflation is what may prompt the Fed to consider cutting interest rates. These comments suggest that the Fed is signaling a significant rally for a prolonged period,” said IFA Global Research. .
The Fed chairman indicated that they “no longer expect” more rate hikes, while adding that no action can be “ruled out” if risks arise.
Will this be the last hike?
From a market perspective, more important than the expected deleterious interest rate hike is the Federal Reserve Chairman’s comment that “a recession is more likely to be avoided than a recession.” The Bureau of Labor Statistics said last month that US inflation fell to 5% for the 12 months ending in March, down from 6% in February.
Hemang Jani, head of equity strategy, brokerage and distribution, Motilal Oswal, said the Fed hike appears to be the last, but rate cuts can only happen if there is a significant deterioration in economic activity or if inflation subsides. Analysts warned that further increases would exacerbate pressure in consumer lending and lead to higher delinquencies. “We believe this will be the last Fed rate hike this year, and there is a high possibility that the Fed will start cutting rates in the second half of 2023,” said Sunil Damania, Chief Investment Officer at MarketsMojo. .
What are the challenges facing the Fed?
Analysts said they would prefer the Fed not to raise interest rates, given the current state of the US banking sector. After the collapse of Silicon Valley Bank and First Republic, PacWest Bank ran into difficulties. The recent rate hike is likely to complicate the situation. In addition, the United States may face challenges in the commercial real estate market.
Moreover, reports from the US, the world’s largest consumer market, indicate that consumer sentiment is weakening even at the high-income end, credit delinquencies are sharply higher, and there is a risk of a sharp rise in unemployment.
What is the impact of this on the Indian market?
Investors viewed the Fed’s comments as a potential pause, perhaps even a focal point, in the next revision. Madan Sabnavis, chief economist at Bank of Baroda, said there is a 52% chance of a rate cut in July. The recent Fed hike may not have a material impact on India as the Reserve Bank of India has paused increases and there is weakness in crude oil prices.
Domestic markets are likely to remain resilient with limited volatility. The prospect of a soft landing for the US economy is positive for the IT sector, which has been in a lag due to fears of weak orders from the US. The strength of the rupee and continued buying by foreign institutional investors (FIIs) will boost the market.
India’s high-frequency indices reflect a resilient economy with improving earnings prospects. “The sharp drop in crude oil is an added bonus to the overall economy and is a detriment to sectors like paints, adhesives and tyres,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
If the Fed chooses to make a cut later in the year, capital flows are expected to pick up. FIIs have already started investing in India, with inflows in April rising to Rs 13,545 crore and Rs 8,243 crore in May so far. If the Fed starts cutting interest rates from July 2023, the markets are expected to rise sharply. The bottom line is this: stay invested and accumulate stocks selectively.
What is the Reserve Bank of India doing?
The Reserve Bank of India (RBI) is still waiting for the impact of its actions over the past 12 months, which is still being worked out. The Reserve Bank of India (RBI) has raised the interest rate – the repo – by a cumulative 250 basis points to 6.5% since May 2022, which is still working through the system. Banks raised lending and deposit rates. The RBI’s decision to pause in the April policy will give relief to borrowers because the benchmark-based external lending rate (EBLR), which is linked to the repurchase rate, will not go up. Lending rates will fall when inflation subsides.
With inflation likely to trend downward from 5.66% in March vs. 6.44% in February, there is a perception in the market that the RBI is unlikely to continue raising interest rates in 2023.
While the central bank sees retail inflation ease to 5.2% in 2023-24, if inflation falls below 5%, the market can expect rate cuts, which boost sentiment.
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