What will be the impact of Jerome Powell’s speech on Indian markets?

In his speech, Powell clearly indicated that he would do whatever it takes to crush inflation. This includes raising so-called fed funds rates by at least 75 basis points at the end of September, when the FOMC meets again, and means there is a risk of raising rates again if the FOMC deems it necessary.

This came as an unpleasant surprise for traders as there was talk of a possible moderation in inflation expectations and expectations of a “soft landing”. In addition, the Fed’s tough monetary stance is being supported by the ECB with a tougher stance. , which is likely to follow with a rate hike of its own in early September, getting messages from several ECB board members who were also present as speakers at Jackson Hole.

Both the Fed and the ECB raised rates in their previous monetary policy reviews, so it follows through an established trend. Almost inevitably, this means bond yields will increase across the eurozone and the US. This also means that the USD is likely to appreciate against most other currencies, and the EUR may also be harsher than non-USD currencies.

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Global traders view this position only in the context of more expensive money and less liquidity, which is called a “risk-off” position. Hence FPIs will cut exposure to high risk assets. This means a withdrawal from emerging market assets (even EMs with convertible currencies). .

Industrial commodities can also see improvement. This is partly a statistical quirk because most commodity prices are reported in USD and a stronger dollar automatically means lower commodity prices. But fears of a slowdown in global growth and consequently weak demand, industrial metals started losing ground sometime back.

Energy prices can also fall for the same reasons. The Indian crude basket (a combination of Oman sours and Brent Sweet) was priced at $116 a barrel in June and $97 a barrel in August as global demand weakened, and fears of a supply disruption due to the Ukraine war eased. A further fall in crude oil prices could be a glimmer of hope for India, which imports 85 per cent of its oil.

We’ve seen some impact on Monday with Wall Street’s Dow Jones IA down 0.6 percent and Frankfurt’s DAX down 3 percent. Selling was also seen in every EM: ​​Nifty fell 1.5 per cent. But the market is set to make a smart recovery on Tuesday with DAX and Nifty recovering from losses. Currency readjustment may also begin, with the rupee hitting new lows against the US dollar before recovering from RBI’s intervention.

Indian equity movements are heavily influenced by the FPI perspective. FPI sells broadly 2,2 trillion worth of Indian equities between January-June 2022 and they have bought approx. 54,000 crore in July-August. After Powell’s stance was clear, he started selling again on Monday. The Nifty fell 13.8 percent between January’s high of 18,350 and June’s low of 15183 and has since climbed to a high of 17,700. But the bears are clearly back in business following this statement of intent for the Fed’s future.

The RBI will have to take cognizance of domestic inflation as well as react to the Fed’s attitude. The RBI has over $564 billion in reserves, but since its invasion of Ukraine in late February, it has spent more than $67 billion to protect the rupee. A considerable portion of the reserves consists of “hot money” that can quickly run out if FPIs (who have around $612 billion in rupee equity assets) continue to sell large amounts.

India’s trade balance is in deep deficit (minus $31 billion in July) and fresh FPI sales will also mean dollar outflows. At the same time, domestic inflation is still running at a high of 6.7 per cent (July). So the RBI is likely to hike the repo rate again (currently 5.4 per cent, with 10-year Treasury yielding 7.2 per cent) again at the end of September, when the MPC meets again at the end of September, and it will be bigger. may choose to be, to match the Fed and the ECB.

Elsewhere in Minto

In Rai, C. Rangarajan a. writes on policy signals from devaluation of rupee, Diva Jain reveals how special interests drive her esg bandwagon, Vivek Kaul explains why real estate bubbles It is easy to fluff but difficult to prick. long story tells how dark stores Have become a bright spot in real estate.

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