What US Fed's rate hike means for Indian stock market

Indian equities surged over 1% following strong global cues after the US Fed raised interest rates for the first time in more than three years, in line with market expectations. The benchmark BSE Sensex surged nearly 1,000 points to above 57,800 whereas Nifty 50 climbed above 17,200 in Thursday’s early session.

The US Federal Reserve raised rates by a quarter percentage point and signaled hikes at all six remaining meetings in 2022 in a bid to curb inflation. Chair Jerome Powell said the US economy is ‘very strong’ and can handle monetary tightening.

“Fed’s projections of another six hikes this year is hawkish and, therefore, the smart rally in markets with S&P 500 and Nasdaq posting 2.24% and 3.7% upmoves respectively was a bit unexpected. The explanation is that the market was oversold and the consequent short covering pushed indices higher. The market drew confidence from the Fed chief Powel’s statement that “the American economy is very strong,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Short-covering in India, too, will lift stock market today with FPIs turning buyers after a long time and softness in crude will support the market. There is upward potential in financials, particularly in high quality private banks in which FPIs were sustained sellers, added Vijayakumar.

The aggressive rate hike outlook has come in response to the US witnessing a run-away inflation exacerbated by rising commodity prices led by geopolitical tensions and supply disruptions, and posed with downside risks to global growth. 

However, “with Fed alluding that economy is on a strong footing and that growth is strong, we reckon the rate hike cycle will be navigated much better this time. From the Indian market’s standpoint, while the impending Fed rate hike has already resulted in strong selling by FII’s in the last few months, the strong support by DII’s has to a great extent mitigated the impact of FII selling. We reckon the markets will take this rate hike cycle in its stride, as prospects remain strong despite the inflationary headwinds and will navigate from the unknown to known territory,” said Niraj Kumar, Chief Investment Officer, Future Generali India Life Insurance.

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