Fed rate move rattles markets across the globe

The Fed took the move to normalise lending after holding interest rates to extraordinary lows for more than a year to prop up the financial system. But the decision, announced after close of equities markets in New York, sent Asian shares lower, with Nikkei 225 index in Tokyo dropping nearly 2 per cent, and both Kospi index in Seoul and Hong Kong’s Hang Seng indexes showing similar declines.

While the central bank had signaled its intentions to take such a step, the timing was a surprise. The announcement was made in a carefully worded statement that emphasised that the Fed was not yet ready to begin a broad tightening of credit that would affect businesses and consumers as they struggle to recover from the economic crisis.
 But while the move will not directly affect home mortgage, credit card or auto loan rates, it was a clear sign to the markets.

The Fed’s board of governors raised the discount rate on loans made directly to banks by a quarter of a percentage point, to 0.75 per cent from 0.50 per cent, effective Friday.

Indian bourses
Likewise, in India, in tune with the Asian markets, the benchmark BSE Sensex closed 136 points down after plunging in early trade in a knee-jerk reaction to US Fed Reserve’s raising rates for emergency loans to banks. Tracking Asian stocks that plunged over 2.5 per cent following the US Fed for the first time after the financial turmoil began in October 2008 hiked the discount rates from from 0.5 per cent to 0.75 per cent, the domestic markets came under heavy selloff by funds and retail investors.

The selloff was so wide-spread that all the BSE sectoral indices, barring healtchare, ended in deep red with losses up to 3.37 per cent. The interest-sensitive reality index bore the brunt with a 3.37-per cent battering. Finally, the Sensex ended at 16,191.63, a fall of 136.21 points or 0.83 per cent. After opening 173 points down the index touched a low of 16,074.58 or 253 points intra-day before recovering in the last hour bargain buying.