Markets to watch Fed meeting as rate cut hopes recede

This week, domestic equities are expected to remain sluggish as hopes of rate cut in June have diminished ahead of the United States Federal Reserve monetary policy meeting. Also due this week are Bank of Japan and Bank of England interest rate decisions, which will be keenly tracked by investors globally.

Last week, Nifty fell 2.1% (470 points) to 22,023 levels after ongoing scrutiny from Securities & Exchange Board of India and above expected inflation data for both US & India. Broader market plunged sharply with Midcap100 and Smallcap100 down 4.7% and 5.5% respectively. Except for IT, all other sectors ended in red. Realty, PSU Banks, Metals and Energy fell between 7 to 9%. Oil marketing companies witnessed selling pressure post petrol and diesel price cut announcement.

Domestic market failed to maintain their positive momentum last week amid intense selling seen in mid and small-caps. Sentiments got dampened after SEBI warned of froth in small and midcaps. Association of Mutual Funds in India (AMFI) has also asked funds to moderate inflows into small and midcap funds and conduct internal stress tests for them with regards to the time needed to liquidate 25-50% of the portfolio. These results are mandated to be disclosed by the 15th of each month. This added to the ongoing concerns and led to profit booking.

Retail inflation came in at 5.1% Y-o-Y for February 2024, slightly above street expectations. On the other hand, wholesale inflation eased to a four-month low of 0.2%. Further, rating agency Fitch estimated India’s GDP to grow at 7.8% in FY24, somewhat boosting sentiments.

Crude prices rose 4% last week to near 4-month high, on signs of improving US demand and tightening fuel markets. Brent oil futures touched $85 a barrel, while WTI crude futures hovered at the $80 a barrel mark.

Several US macro data came last week which were not up to the market’s expectations, leading to a rise in the US 10-year bond to 4.273%. The probability of Fed rate cut in June has also fallen to 64% versus 82% a week earlier. Retail inflation showed some stickiness as it rose 3.2% versus estimates of 3.1%.

Further, Japan’s GDP increased by 0.1% in October-December quarter, which raised speculation that the Bank of Japan is likely to increase its interest rates and discontinue its ultra-loose monetary policy which is due this week.

We expect broader market volatility to continue in the near term, while the long term growth trend remains positive. Thus, retail investors should take this correction as an opportunity to accumulate quality names in 3-4 tranches. We suggest making a higher allocation towards large caps as valuations are comfortable along with steady growth prospects.

(The writer heads retail research at Motilal Oswal Financial Services Ltd)