Sensex shrugs off Fed rate hike

“The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run,” US Fed said after its two day policy meeting. According to Bloomberg, US policy makers have also forecasted 1.375 per cent as an appropriate rate at the end of 2016, implying a one per cent increase in the next year. Fed chairperson Janet Yellen, however, said that markets and officials would be well prepared for the next move. “We’ve made a commitment to emerging market policymakers that we would do our best to communicate as clearly as we could about our policy intentions to avoid spillovers that might result from abrupt or unanticipated policy moves,” she said.

Mirroring the trends in global markets, the Sensex gained 309.41 points or 1.21 per cent to close the day at 25,803.78 while the Nifty ended the day at 7,844.35 gaining 93.45 points or 1.21 per cent. Most of the Asian equity indices closed the day with strong gains. While Japan’s Nikkei 225 climbed 1.59 per cent, Shanghai Composite, Taiwan Weighted and Jaka-rta Composite gained 1.83 per cent, 1.65 per cent and 1.62 per cent respectively. Equity markets across Europe also registered impressive gains on Thursday.

“There are a couple of positive things that came out from the Fed statement. First, they stated that the further tightening would be slow and gradual. A further rate hike would also depend on the pace of global growth. Secondly, they have committed to maintain the balance sheet size at the same level for an extended period of time. My sense is that the US dollar would soften a bit in coming days, which is good for emerging market currencies and their stability,” said Andrew Holland, CEO, Ambit Investment Advisory.

According to the provisional data, foreign portfolio investors purchased shares worth Rs 638.01 crore.

“The Fed decision has finally ended the uncertainty, which had enveloped the global financial markets over the last couple of months that had led to high bouts of volatility in equity, bond and currency markets. So this came as a huge relief for the equity market,” said Ambareesh Baliga, senior market analyst.

India is better placed to deal with the US Fed rate hike due to impro-vement in external balances and less dependence on commodity exports, say experts. Chief Economic Advi-ser Arvind Subraman-ian said on Thursday that the impact of the US interest rate hike should be minimal in India as the country is relatively well cushioned. “The impact (rate hike) will happen depending upon what it signals about the future rate hikes. I think that is still a little bit open. Lets wait,” he said.

The finance ministry said that Indian stocks and forex markets have reacted well after the US Fed decision. “Both the market indices actually rose. The rupee is stable in the 66-67/$ range,” said the finance ministry. Finance minister Arun Jaitley said that with the suspense about the US Federal Reserve’s rate hike now over, markets will have to reconcile to the new financial situation. Asked about the behaviour of the currency markets in the wake of the rate hike and how the government intends to tackle possible capital outflows, he said: “Let’s watch for a few days.”

Rating agency Fitch also gave thumbs up to the India. “India is not immune to potential general emerging market jitters related to the Fed lift-off, but it is better placed than many of its peers for a number of reasons,” said Thomas Rookmaaker, director (sovereign ratings) Fitch Ratings.

However, Citi Research warned the government that “disappointment over reform outcomes, reemergence of inflationary pressures and the possibility of fiscal slippage remain sources of domestic risk to an otherwise a positive rupee story.”

The rupee opened firmly higher at 66.62 from Wednesday’s close of 66.73 at the Interbank Foreign Exchange Market against the backdrop of overnight developments and continued its strong upmove till the final trade to end with a solid gain of 31 paise, or 0.46 per cent at 66.42 — the level not seen since November 24. It briefly touched an intra-day low of 66.6750.

Frantic dollar selling by banks and corporates alongside unwinded long dollar positions by speculators helped the rupee to rally.

According to Reuters, the RBI was estimated to have sold $500 million to $1 billion on Wednesday to prop up the rupee in the lead-up to the Fed meeting. Forex traders also cited active buying of bonds in secondary markets over the previous few days. They feel that the RBI wants to signal its intention to tackle “acute currency volatility”.