US Fed pauses rate hike: How will it impact the Indian markets?

The US Federal Reserve kept its key interest rate unchanged at 5.1 percent for the first time after raising it 10 straight times since January 2022 in order to combat high inflation. This is still the highest level in 16 years.

However, the US Fed warned that is not the end of a rate hike cycle and signalled to raise rates twice more this year, which could begin as early as next month, in July. Top Fed officials said that they want to take time to more fully assess how their rate hikes have affected inflation and the economy.

This meeting had both dovish and hawkish tones. While the FOMC pausing its 500 bps hiking cycle is arguably dovish, it shifting its guidance back to 'further hikes' after turning more neutral in May has a more hawkish tone.

When asked why not simply hike in June itself, US Fed Chairman Jerome Powell said that it was a continuation of the process of slowing down the speed of hikes, which is different than the ultimate level of the terminal rate.

Markets now project a 70 percent chance of a hike in the next month.

Post the US Fed policy decision major global markets remained mixed. While pausing was a positive, US Fed made it clear that this is not the end, which kept the markets on edge.

Indian markets also followed the global trends and were volatile in the early deals, swinging between gains and losses before paring all gains to remain in the red.

Let's now see what experts have to say about this US Fed decision and how will it impact the Indian markets. While some experts believe that India continues to remain in the sweet spot on the back of resilient growth and falling inflation. Others expect the Indian markets to remain volatile in the near term and any correction should be used as an opportunity to buy.

Positive

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services

The Fed's decision to ‘skip’ rate hikes was overshadowed by the more hawkish-than-expected commentary. The Fed chief’s comment that 'nearly all committee participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year' is negative news. 

The Fed now expects the Fed funds rate to be around 5.6 percent by the end of 2023 and 4.6 percent by the end of 2024. Interest rates remaining higher for longer will impact global growth which has slightly negative implications for global markets.

However, India has the best growth-inflation balance among large economies with resilient growth and falling inflation. So, domestic cyclical will do well, going forward. Investors may focus on financials, automobiles, capital goods and construction-related segments.

Ritika Chhabra- Quant Macro Strategist – Prabhudas Lilladher PMS

While the Fed's hawkish statement might create some volatility in the equity markets, overall we are constructive on the Indian stock market. India continues to be the bright spot in the EM space. Our economic data continues to surprise on the upside. This is in contrast to the data coming in for China, which has been disappointing. From a global perspective, India is in a sweet spot that will keep attractive foreign inflows.

Negative/Volatile

Divam Sharma- Founder at Green Portfolio PMS

With the median expectation of a funds rate of 5.6 percent by the end of 2023 and almost a 71 percent chance of a US recession by May 24, we could expect some turbulence over the coming months.

However not as aggressive as in May, the trend of FPI inflows should continue to support markets. We have run up significantly since April and any 5-10 percent correction in the broader markets should be used as an opportunity to allocate funds to Indian equities.

Kedar Kadam, Director - Listed Investments, Waterfield Advisors

Regarding the Indian markets, while domestic inflation trends are indicating a potential cooling off, uncertainties surrounding the monsoon season and a comparison of equity valuations with other emerging markets introduce additional risks. We anticipate an upward risk to domestic inflation, but only time will reveal the true extent.

If global interest rates continue to rise or even remain at their current levels, it is crucial to pay attention to the currency aspect. Therefore, we do not foresee any rate cuts from the Reserve Bank of India in the near term.

Additionally, given the significant increase in the cost of capital and mounting risks to earnings, it is essential to approach current equity valuations with extreme caution. Although India appears to be the most attractive and promising investment option, it is necessary to consider earnings growth in relation to valuation. 

We cannot ignore the impact of the global economic backdrop and premium valuations on the domestic front. Therefore, we recommend exercising caution and adopting a staggered buying approach. I would like to emphasize once again that the year 2023 is a time for accumulation and a market where stock picking plays a crucial role.

Neutral/Mixed Impact

Arvinder Singh Nanda, Senior Vice President of Master Capital Services

Though it is just a pause in the rate hikes for the first time since Jan 2022, they have guided for 2 more rate hikes in the future to bring down the inflation back to the targeted 2 percent going forward. We believe currently the impact on Indian markets will be neutral in the short term and the Indian markets will take further cues from the slowdown in the US economy and inflation which will result in rate cuts in the latter part or the beginning of next year in the US. 

In the near term, The Indian market will be driven by certain factors such as El-Nino/progress of monsoon, crude oil trajectory and any surprise spike in inflation that might result from RBI reversing its prolonged decision of rate cuts.

Sonam Srivastava- Founder at Wright Research

The US Federal Reserve's decision to pause rate hikes, coupled with a hawkish stance, could have mixed effects on Indian markets and Foreign Institutional Investor (FII) flows. In the short term, low US interest rates may drive more FIIs towards high-yielding markets like India, potentially fueling the ongoing market rally, particularly in small and mid-cap stocks. The pause in rate hikes could also weaken the US dollar, making Indian assets more attractive.

However, the Fed's hawkish stance suggests potential future rate hikes, which could reverse FII flows if US assets become more attractive. The hawkish stance could also impact investor risk appetite, potentially affecting FII flows. The actual impact will depend on various factors, including global economic conditions, future Fed decisions, and investor sentiment.

Nishit Master, Portfolio Manager, Axis Securities PMS

The US Fed has maintained interest rates as expected but the dot plot used by the Fed to signal future interest rates implies further two hikes in 2023. We believe this is unlikely unless commodity prices including crude oil move up significantly. 

We believe this is more or less the end of the increasing rate cycle by the US and future market movements globally will be determined by economic growth, corporate earnings, and financial stability in the developed world.

Mahesh Agarwal, National Head – Wealth, AUM Capital Market

Central Bank globally is refraining from supporting bullish sentiment on bond street. Post-Fed pause but with hawkish tone yields are expected to turn volatile in the US. In India, the Bond yields shall consolidate from here on with a downward bias. The amount of systemic liquidity in the system shall influence the movement of yields in the short term.