Signs of Fed rate hike scare investors, may increase capital outflows

Investors are concerned that other global central banks will follow the Fed’s sharp turnaround, resulting in capital outflows from emerging markets such as India.

To counter the economic shock of the pandemic, the US central bank slashed borrowing costs to nearly zero in 2020.

Indian stocks joined the global sell-off on Thursday. The BSE Sensex slipped 581.21 points or 1% to end at 57,276.94. The Nifty index of the National Stock Exchange closed at 17,110.15, down 167.80 points or 0.97%.

Shares in other Asia-Pacific markets also fell, with Japan’s Nikkei 225 falling 3.11%, South Korea’s Kospi 3.5%, Hong Kong’s Hang Seng by 1.99% and China’s Shanghai Composite down 1.78%.

On Wednesday, US central bank chief Jerome Powell promised a continued fight to contain inflation. Subsequent interest rate increases and eventual reductions in the Fed’s asset holdings will happen as needed, Powell said, while officials monitor how quickly inflation falls from current multi-decade highs to the central bank’s 2% target. Much was left undecided, he told reporters after the end of the Fed’s latest two-day policy meeting, including the pace of subsequent rate hikes or how quickly officials would allow its massive balance sheet to decline.

Indian bond yields rose while the rupee hit a one-month low on Thursday. US two-year bond yields hit a 23-month high in March after the Federal Reserve stuck to interest rate hike plans and Powell warned about inflation, and the dollar broke out of its recent range. done. Markets feared that the central bank might be more aggressive in its monetary policy to curb inflation.

“Hawkish US Fed commentary, rising crude oil prices and selling by foreign institutional investors were the key reasons for market negativity,” said Siddharth Khemka, head-retail research, Motilal Oswal Financial Services Ltd.

Investors fear that after the Fed meeting, selling in FII stocks could turn aggressive as rate hikes in the US generally make emerging market assets less attractive. In January alone, FIIs were net sellers of $2.2 billion worth of Indian stocks, while continuously pulling out funds over the past four months. FIIs have sold Indian equities worth $6.97 billion since October 2021. However, the markets are still backed by money from domestic institutional investors. 12,039.76 crore in January.

Analysts at ICICI Direct said, “Market participants fear that tightening monetary policy to contain high inflation may prompt foreign investors to pull out liquidity from emerging markets.” The brokerage said the dollar index may continue its positive bias as the US Fed indicated aggressive monetary tightening. It looks like the Indian currency could fall to 76.30 against the dollar amid continued FII outflows, a firmer dollar and rise in crude oil prices.

Oil rose to $90 a barrel on Wednesday for the first time in seven years amid rising crude oil supplies and rising political tensions between Russia and Ukraine.

According to Madan Sabnavis, chief economist at Bank of Baroda, the Reserve Bank of India has to take a call on the return of liquidity, and the long-term guidance of the Fed could be taken as a template for consideration by the Monetary Policy Committee.

“We have high inflation and uncertain growth, just like the US. The market is demanding higher returns and the question is how long can RBI hold on to the current stance.”

Analysts at BofA Securities expect the Fed to hike rates higher than the market is currently. “We still think the market could push prices up 6-7 this year and would encourage clients to position like this. We also expect the market to push the Fed by 50 basis points (bps) in March.” Will continue to challenge for hikes. If market prices rise 50 bps in March, we expect the Fed to follow suit given its current “polite” and “agile” approach to policymaking, BofA Securities said in a note dated January 26.

Reuters contributed to the story.