Indian markets and its global peers fell on Thursday after the Federal Reserve said interest rates will go higher for longer, dashing hopes that the recent soft inflation reading will prompt the US central bank to take a dovish turn.
The Sensex fell 879 points, declining 1.4 per cent to end the session at 61,799. Thursday’s decline is the biggest in two months for the Sensex. The broader-market Nifty 50 index closed at 18,415, with a decline of 245 points, or 1.3 per cent. Index heavyweights like HDFC Bank and Infosys weighed on the market. The Nifty IT index fell over 2 per cent given its high exposure to the US markets.
Investors were disappointed after the Fed’s statement rebuffed hopes of a dovish tilt to make it clear that interest rates will remain higher for some time. Jerome Powell, the Federal Reserve chief, said the US central bank will not stop its efforts to tame inflation despite recession fears.
The Fed raised its benchmark rate by 50 basis points to a 4.25 to 4.5 per cent target range. Powell said the size of the next rate hike will be data-dependent and refuted rumours that the central bank will reverse hikes next year.
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2 per cent in a sustained way,” Powell said. “Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
The Fed is now expected to raise rates to as high as (terminal rate) of 5.1 per cent, higher than the market projection of 4.6 per cent.
Analysts said Fed’s language was hawkish and contrary to expectations. Equities had rallied last month hoping the Fed would pause on hikes after a statement by Powell earlier hinted at a policy shift.
“The market was hoping for a less hawkish tone, which was missing. If we go back a year ago the Fed chair was saying inflation was transitory but the market was saying it is not. Now the Fed chair is saying he will keep rates higher for longer but the market has a different view. This debate is going to rage a little bit more in the third quarter and will add to the volatility. If the market is right and the Fed continues with its policy then the mild recession people may think will be harsher and deeper,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.
Foreign portfolio investors (FPIs) sold Indian shares worth Rs 711 crore, while their domestic counterparts provided buying support only to the tune of Rs 261 crore. The US dollar advanced amid demand for safe haven assets.
“The Fed was more hawkish than markets had expected. They seemingly still want financial markets to tighten further, which essentially means they want lower equity prices,” said a note by Jack McIntyre, a money manager at Brandywine Global Investment Management.
Barring two, all Sensex constituents ended with losses. Infosys declined 2.6 per cent and contributed the most to Sensex’s loss. HDFC Bank fell 1.8 per cent.
The market breadth was weak with 2,227 stocks declining and 1,325 advancing. Half a dozen major economies including the UK, Mexico, Norway, Philippines, Switzerland, and Taiwan, are going to announce their rate decisions on Thursday and investors will track them for further cues.