Jerome Powell speech unlikely to stir India markets, deter foreign inflows

On the contrary, flows into India may surge if the Covid situation remains in control, say experts

The latest soundbites on taper by US Federal Reserve Chair Jerome Powell would unlikely stir the Indian markets or affect portfolio flows a lot, as fears of a more hawkish tone gave way to the reassurance of continuity, albeit with nuances.

Market participants were not expecting a hasty withdrawal from the Fed’s accommodative policies but the annual speech of the Fed chief was still being monitored for any hint of premature tightening.

This is because the end-June Federal reserve minutes had raised concerns about an earlier withdrawal of accommodation by the US Fed. As the job market improved and inflation overshot the target of 2 per cent, seven of 18 Federal Open Market Committee (FOMC) members expected rates to rise as early as next year, while 13 favoured 2023 to be the starting point for hikes.

Powell, through his speech and the subsequent question-answer session, assured the markets that any rate hike would follow a gradual slowing down of $120-billion monthly bond purchases.

The Fed continues to see inflation as transitory — high in the short term but softer in the medium term, a stance taken by the Reserve Bank of India (RBI), as well.

“If you are doing $120 billion worth of asset purchases every month and if you reduce it by $10-15 billion, that’s still a large amount of money sloshing around in the system,” said Andrew Holland, CEO, Avendus Capital Public Markets Alternate Strategies.

“The impact of the Fed chief’s speech on FPI flows into India should be minimal. On the contrary, flows may pick up if the Covid-19 situation is kept under control and corporate earnings growth remains strong,” Holland said, adding that India also stands to gain as China raises regulatory hurdles for foreign funds to invest in that country.

Experts say most central banks, including the Fed, are adopting a well-telegraphed approach as they gear up to realign their ultra-accommodative monetary policies.
 

“On quantitative easing taper, the Fed chairman, in order to thwart any residual risk of taper-tantrum, has de-linked tapering with tightening by stating that the bar for an eventual rate hike is much higher,” said B Prasanna, group executive and head of global markets, ICICI Bank.

Therefore, there is no reason to believe that flows are going to slowdown abruptly.

“Central banks globally are running the show, even as Covid uncertainty prevails. They are cautious and won’t like to take steps that create any sort of financial instability,” said Jayesh Mehta, head of treasury at Bank of America.

Local bonds -- the 10-year yield last closed at 6.26 per cent last -- shall follow cues from the 10-year US yield, which softened marginally to 1.33 per cent after the speech, Mehta said.

This is also positive from the equities and currency market perspective. After heavy selling in July, foreign portfolio investors (FPIs) have been net buyers in August, to the tune of Rs 986 crore (until August 27). However, market experts remain sceptical of whether these investors will commit significant fresh money, considering stretched valuations.

The Sensex closed at an all-time high of 56,124.72 points on Friday, before the speech. The Markets posted modest gains last week, taking cues from firm global markets, with the Nifty 50 settling around the week’s high of 16,705. In the coming week, key economic data points, such as the first quarter gross domestic product (GDP) growth rate and manufacturing and services Purchasing Managers Index (PMI), will provide cues. In the coming days, commodity prices, the pace of vaccinations in India, unlock measures by various states, GST collections, and progress of the monsoon across India would be factors to watch out for, say experts.

Analysts say, the Nifty could inch up to 17,000 levels going forward. In case of a correction, the same could be in the range of 2-4 per cent.

The rupee strengthened on Friday as the RBI decided not to absorb the dollar inflows but it would likely resume its dollar accumulation if inflows pick up substantially in the coming days on account of a strong pipeline of initial public offerings and disinvestments by the government.

The RBI, currency dealers say, cannot let the rupee appreciate significantly when its peers are depreciating. The rupee closed at 73.69 a dollar on Friday, and it is unlikely that the RBI will let it strengthen beyond 73.50, currency dealers say.

“The gradual withdrawal of monetary easing is a reassurance from central banks that growth is coming back on firm footing, which matters more in the medium term. The initial positive response from all asset classes to the symposium outcome testify this and the Indian markets will also likely carry forward the same message in the near term,” Prasanna said.

However, a few experts opine the Fed is steadily moving towards normalisation, albeit with enough warning, and therefore, “the market participants may gradually realise that the liquidity party causing asset price inflation is being called off and that may cause overseas investors to react,” said U R Bhat, co-founder and director, Alphaniti Fintech.

The taper this time, though, may not cause as much damage as it did in 2013 “as the country has enough forex reserves ($617 billion) and the overseas investors are playing a lesser role in dictating market movement,” Bhatt said.