Fed's hawkish stance rattles markets

Rupee hit a new low after the US central bank forecast more rate hikes

Indian shares tumbled and the rupee dived to a fresh low against the dollar on Monday as investors fled risky assets after the U.S. Federal Reserve unveiled plans to keep raising interest rates to fight inflation, even at the risk of an economic downturn.

In his August 26 speech, which took place after the Indian markets had closed, Fed Chair Jerome Powell signalled that the U.S. central bank was likely to leave interest rates elevated for a while, disappointing many who expected it to soon reverse course amid slowing growth.

"This has rattled markets which were thinking in the other direction and have become complacent about the future Fed Action," said Ashutosh Mishra, Head of Research, Institutional Equity, Ashika Group.

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The NSE Nifty 50 index closed down 1.4% at 17,312.90, while the S&P BSE Sensex fell 1.5% to close at 57,972.62, echoing the sentiment across global markets.

The Fed’s hawkish stance also revived recession fears.

"US recession fears have again mounted and IT faces the biggest brunt. The markets have reacted on expected lines," said Geetanjali Kedia, Senior Research Analyst, S P Tulsian Investment Advisers.

Some said the stock market correction was not all bad.

“The last couple of months saw a vertical journey with the markets recovering nearly 19% in a very short term,” said Sameet Chavan, a chief analyst for Technical and Derivatives at Angel One. "Some breather was needed and the correction is a healthy sign."

Chavan said he did not expect the NSE Nifty 50 index to fall below the 17,000 mark.

Some others focused more on the near term.

“The impact of (any) global slowdown will definitely reflect on us also in the coming month. In our view, (the) road ahead from here till the September meeting of the Fed Reserve will be full of volatility," Mishra said.

Powell's speech also hit the rupee as it recorded a new low of 80.15 against the dollar during the day, before settling at 79.94, 10 paise down from the previous closing.

Currency analysts said the greenback tested highs of 109.47 mark, following the hawkish signals from the US Fed chair.

“The US Fed chief stressed the need for a restrictive monetary policy for some more time to tame surging prices, leading to jitters in the market and a downwards drift in the global as well as domestic equities,” Sugandha Sachdeva, Vice President - Commodity and Currency Research at Religare Broking, said. “Besides, rising demand from oil importers amid steady crude oil prices is another factor that’s weighing on the domestic currency.”
Two key factors that could affect the rupee-dollar exchange rate further were U.S. non-farm payroll data and domestic GDP data for the June quarter, she pointed out.