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Sunday, April 11, 2021

Explained: Indian market, after Federal Reserve move

A day after the US announcement that interest rates are being kept low, the Indian market fell 1%. This may be a correction over immediate concerns; analysts are optimistic about the market in the long run.

Written by Sandeep Singh | New Delhi |
Updated: March 19, 2021 8:01:31 am
The announcement from the Federal Reserve (above) has boosted markets in many countries, but the Sensex tanked 585 points on Thursday. (Reuters)

In a reprieve for the debt and equity markets, the Federal Reserve on Wednesday announced that the interest rates are being kept near zero. While it maintained that it will continue the flow of credit to households and businesses and support the economy, it indicated that there may not be any interest rate hike through 2023.

While that boosted investor sentiment and led to a rise in major indices around the world, the Indian market fell by over 1% on Thursday, despite opening on a strong note. The Sensex fell 585 points or 1.2% to close at 49,216 on Thursday, taking the fall over the last five trading sessions to 2,063 points or 4%. The weakness continued even as the Fed announcement comes as a positive for equity and debt markets. Market participants feel that while the market may be witnessing some correction on account of concerns over rise in bond yields and domestic factors including rise in Covid-19 numbers over the last week, the trajectory for the market remains upwards and investors should stay put and invest on dips.

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What has the Fed announced?

The Federal Reserve maintained that the path of the economy will depend significantly on the course of the pandemic and progress on vaccinations. The Federal Open Market Committee (FOMC) said that it expects to maintain an accommodative stance in its monetary policy until it achieves maximum employment and inflation of 2% over the longer run.

“The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals,” the statement read. It said these asset purchases will help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

While the Fed has announced it will keep interest rates near zero, market experts say the issue hovers around the rise in bond yields which impacts the equity markets, and that is where there is a disconnect between market and central banks. While central banks can keep their policy rates low, the long-term bond yields are getting determined by factors such as expectations of higher growth and inflation. “If the yields start rising then they start competing with equities, and that impacts equity market movement,” said Pankaj Pandey, head of research at ICICIdirect.com.

What does it mean for Indian markets?

With the Fed having indicated there may not be a rise in interest rates through 2023, market experts feel the announcement would calm the markets that have been wary of a rate hike earlier than expected. “If we go by that, it will have a soothing effect on both the debt and equity markets. It gives nearly two years’ time and that will provide stability to the markets,” said C J George, MD, Geojit Financial Services.

A fund manager with a leading fund house said if a sudden rise in bond yields raised concern on the continuation of FPI fund flow, the Fed’s announcement that it will continue to provide liquidity for a reasonable period will ensure the equity markets will remain strong. “There may be ups and downs depending upon domestic news flow around Covid-19 and other factors, but overall the trajectory of the markets is upwards and it will be supported by a rise in earnings, growth in economy and fund flow by FPIs,” he said.

There are some who say that if the bond yields in the US keep rising, it will have an impact on the fund flow into emerging market equities. “However, if we keep our house in order and increase the risk return potential of our stock through generating higher growth by executing asset monetisation, capital expenditure plan and stability in policy making, India will continue to attract foreign funds into equities,” said Nilesh Shah, MD, Kotak Mahindra AMC.

In the second half of February, G-Sec bond yields spiked from around 6% on February 15 to over 6.2% on February 22 and have stayed around those levels till date. This was in line with a spike in bond yields in the US and other developed markets.

It is important to note that while foreign portfolio investors have pulled out a net of over Rs 15,700 crore from the Indian debt market between February and March 2021, they have continued with their net investment in Indian equities — Rs 38,764 crore between February to March. Over the last five trading sessions, when the Sensex has lost 4%, FPIs have put in a net investment of Rs 15,700 crore even as domestic institutional investors have sold equity holdings worth a net of Rs 3,750 crore.

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Will the markets rise and what should investors do?

While rising bond yields, a jump in Covid numbers and announcement of lockdowns across several districts by various state governments has dampened investor sentiments domestically and has led to some profit booking on highs, market participants say that since central banks globally are expected to support their respective economies, provide liquidity and keep the interest rates low, equity markets will benefit.

They are, however, keeping a close eye on bond yields. There is a feeling in the market that bond yields in US up to levels of 2-2.25% will not have a huge bearing on equity markets, but if the levels inching closer to 3%, it will start hurting equities both in developed and emerging markets.

Besides concerns around bond yield and rising Covid numbers, Pandey said equity markets have also been impacted by profit booking which some participants go for towards the end of the financial year. “I have a feeling that markets would stabilise April onwards,” he said.

There is also a sense that as more and more people get vaccinated over the next three to six months and the economy stabilises further, earnings growth and global liquidity flow will push the markets further up.

While some investors are concerned over the fall in the markets in the recent past, the CIO of a leading mutual fund said, “We are still in a bull market and one must understand that a 2000-point correction after a 20,000-point rally is not something to be worried about. Also, while central bankers won’t talk much about bond yields, they will intervene when required. For now, their primary concern is supporting growth and employment generation.”

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