On expected lines, the US Federal Reserve hiked the policy rate by another 75 basis points taking it to 3.25-4% from earlier 3-3.25%. FOMC is committed to taming inflationary pressure and hence maintained its aggressive approach towards monetary policy. The US market reacted to Fed's hike in a seesaw pattern, while Asian cues witnessed a drop including lacklustre demand in Indian equities. The reason behind the volatility in equities globally is due to Fed's embracing a more hawkish outlook than expected.
At home, Thursday's trading session was volatile with Sensex and Nifty 50 witnessing subdued demand before ending in the red. Banking stocks gained traction however could not keep bears off the bay as IT and auto stocks majorly dragged the indices. Noteworthily, midcap and smallcap stocks edged higher amidst corporate results.
Meanwhile, the Indian rupee dipped against the US dollar after the Fed's outcome. The local unit finished at 82.88 per dollar on Thursday compared to the previous closing of 82.78.
On November 2, FOMC decided to raise the target range for the federal funds rate to 3-3/4 to 4%. FOMC anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
FOMC said, "In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments."
Further, FOMC will continue to reduce its holdings of Treasury securities and agency debt and agency mortgage-backed securities.
Fed's chair Jerome Powell stated that rates could peak at higher levels than policymakers previously anticipated, however, did not disclose when a pause in the rate hikes can be expected.
Over Fed's rate hike impact on Indian markets, Gopal Kavalirddi, Head of Research at FYERS said, "The US Federal Reserve’s fourth consecutive hike of 75 bps was in line with market expectations, continuing on the trajectory that opted to tame the multi-decade high inflationary pressure. While the size of the rate hikes could reduce in the upcoming policy meets, the continuation of the current rate hike path is certain. With the September consumer price inflation at 8.2% and target inflation at 2%, it’s a long road ahead."
Further, FYERS expert added that after the announcement, stocks in the US rallied initially and then fell, while bond yields rose. Expectations for a terminal rate just above 5% are gaining traction among analysts.
In India, Kavalirddi said, "stock markets remain subdued due to the negative handover from yesterday and continue to persist around the 18,000 mark. Nifty 50 is less than 4% away from its all-time high and continues to meander in a 200-point range, waiting for a positive boost to higher levels."
Going forward, Kavalirddi said, "The current earnings season is playing its part, keeping the index range bound based on the continuous news flow. From the quarterly results declared to date, it is very evident that many companies continue to bear the impact of higher raw material procurement, inventory and wage costs, along with other increased operational expenditures."
In terms of sectoral indices, FYERS expert highlighted that banking and financial sector-related companies have posted excellent results, backed by higher net interest margins and credit growth, lower non-performing assets, and slippages. Public sector banks shine in terms of earnings growth.
According to FYERS, the expectation is that November could be the month to bring in new highs for the index, to sign off the year on a flat note, marking CY22 as the year of price and time consolidation for Indian stock markets.
ICICI Direct expects a 50 bps rate hike in the December meeting from Fed. In a report, the stock brokerage said that the CME Fed tool watch indicates a 61.5% probability of a 50 bps rate hike in the December meeting. Additionally, other major central banks across the globe are likely to lag behind in tightening monetary policy as policymakers are facing a dilemma with inflation hitting record highs and economic growth weakening.
On Indian currency, ICICI Direct's note said, as long as US$INR sustains above 81.80, it is likely to depreciate till 84.00 in the coming month amid strong dollar, persistent FII outflow, a surge in crude oil prices and concern over widening of the trade deficit. FII’s have turned net sellers. In October there has been outflow of ₹3,080 crore into Indian markets.
It added, "the rupee may slip on worries over a slowdown in global economic growth. However, possible RBI intervention in forex market to curb volatility may prevent a sharp rupee depreciation."
Also, Mitul Shah - Head of Research at Reliance Securities said, "Federal Reserve raise policy rate by 75bps for a fourth straight time. The 2QFY23 earning season so far witnessed healthy revenue growth but higher inflationary pressure took toll on profitability. Inflation continues to remain high, both in the domestic and the US economy. Any disappointment in earnings or weak management commentary on demand may lead to correction given sharp outperformance of Indian equities. India' is expected to maintain healthy growth pace of ~7% GDP growth over the next few years and be among the fastest growing economies globally this decade. The global companies trying to re structure supply chains leading to China plus one strategy which is likely to continue to favour India's growth prospects in the coming years."
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