The US Federal Reserve, in its latest policy on Wednesday 22nd March, decided to take a much smaller increase in key interest rates by a quarter-percentage point. The federal funds rate is now between 4.75% to 5%. However, the Fed also signaled pausing further rate hikes amidst the recent financial sector turmoil after the failure of two banks.
The Federal Reserve raised rates by 25 basis points; however, its policy statement, however, no longer said “ongoing increases” were expected to occur. The shift in the central bank’s tone gave a sense of relief to the markets that had been concerned about a liquidity crisis in the banking sector since the failure of two US regional lenders earlier this month.
The Indian equity market was expecting this quarter-percentage point interest rate hike, which it had already discounted in a recent sell-off. Rising interest rates make it expensive for people to borrow and spend. In all likelihood, the US dollar is expected to find selling pressure as foreign institutional investors (FIIs) have started pulling out of Indian equity markets.
According to some analysts, the hike by the US Fed is a significant purchasing opportunity for Indian investors with a long-term outlook. Avinash Gorakshkar, Head of Research at Profitmart Securities, said, “After the US Fed’s 25 bps rate hike, the US dollar is expected to find selling pressure, and hence IT, banking, and export-oriented auto sector stocks are expected to become highly volatile. However, this volatility in IT, auto, and banking sector stocks should be considered a good buying opportunity by positional investors.”
Ravi Singhal of GCL Broking said that one IT stock to buy after the 25 bps US Fed rate hike is TCS. If it becomes available at around Rs2900 to Rs 3,000 apiece levels in the near term, then it would be a significant purchasing opportunity for long-term IT sector investors.
However, while Indian analysts may be optimistic about the prospects of some sectors likely to benefit, the failure of banks in the US has sounded the alarm bells for international investors. JP Morgan, in a report to its clients, said that “A series of banking crises, including the failure of Silicon Valley Bank, market turmoil, and ongoing economic uncertainty, have increased the chances of a surge in recession.”
JPMorgan Chase strategists referred to the current challenges as a possible “Minsky moment,” named for the American economist Hyman Minsky, who famously predicted that extended bull markets naturally end in epic and monumental collapses.
JPMorgan analysts further wrote that the Minsky moment is nearing as the past few weeks have seen several economic and geopolitical threats to the world, including banking crises on both sides of the Atlantic, China brokering of a new diplomatic deal with Saudi Arabia and Iran, and Chinese President Xi Jinping’s high-profiled visit to Moscow.
Another impact of the Fed rate hike was on the oil sector, where the dollar is the primary instrument for trade. Oil prices fell on Thursday following three sessions of gains, after U.S. Federal Reserve Chair Jerome Powell re-stated his commitment to curbing inflation, including the possibility of more interest rate rises. Oil prices fell in Asian trade on Thursday tracking weak economic signals from the Federal Reserve, while media reports suggested that OPEC+ will likely keep output unchanged next month, despite a recent crash in prices.
ABOUT THE AUTHOR
Ketan Sonalkar (SEBI Rgn No INA000011255 )
Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.
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