US Fed holds rate: Flip-flop shakes the market confidence

“Generally, no hike in interest rate and dovish guidance by the US Fed is good for India but Wednesday’s decision to defer rate hike and a guidance that there will be only two rate hikes of 25 basis points each, this year, in my view will only weaken the markets confidence. It has sent a signal that the US Federal Reserve does not have confidence on the strength of US economy,” said Ritesh Jain, CIO, Tata Mutual Fund.

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On Thursday, while the Sensex at the Bombay Stock Exchange rose by up to 306 points over Wednesday’s closing, it finally closed the day in the red with a marginal fall of 5 points. The FIIs remained positive investors during the day and invested a net of Rs 744.5 crore in Indian equities.

Jain feels that the movement of dollar over the next few days will determine the trend in the equity markets in emerging economies going forward.

“Going forward if the dollar weakens then it will be a short-term positive for the emerging markets, however, if the dollar strengthens over the next few trading sessions then volatility will return to market and more importantly will signal that market has started losing confidence in central bank’s ability to bring back growth,” he said.

On Wednesday, while indicating a moderate US economic growth and strong job gains, the US central bank, noted that the US continues to face global risks.

“A range of recent indicators, including strong job gains, points to additional strengthening of the labour market. Inflation picked up in recent months,” the Fed said. “However, global economic and financial developments continue to pose risks” and will keep inflation low for the remainder of 2016, it said.

While the Federal Reserve chair Janet Yellen, on Wednesday said that it remained to be seen whether the recent firming in US core inflation would be sustained, the policymakers projected weaker economic growth and lower inflation this year and also lowered their estimate of targeted lending rate at 3.30 per cent from 3.50 per cent in the long run, which indicates a weak economic recovery.

Though the US Fed had in December 2015 given an outlook that it would go for 4 rate hikes, in just three months time they are saying that it would be appropriate to raise rates by about a half a percentage point by the year end. The new rate outlook came as the Fed attempts to steer through recent global volatility and keep its rate hike plans somewhat intact.