Federal Reserve unlikely to change its stance in the near term: Analysts

Say volatility in India and other markets due to inflationary pressure in the US likely to be transitory

The volatility on account of US inflationary pressure is likely to be transitory for India's equity markets. Analysts said the Federal Reserve is unlikely to change its stance in the near term.

Worries over a possible rise in inflation in the US due to rising commodity prices have rattled the markets this week. On Thursday, while most Asian markets ended in the red, Eu­ropean indices turned the tide from losses to gains after US markets opened in the green. The MSCI world equity index, which includes 50 countries, fell 0.6 per cent and was on course for its fourth straight day of losses and weekly fall of nearly 4 per cent, which would be its worst since last October.

Investors fear that a surge in inflation in the US would force central banks to raise interest rates and trigger a flight of capital from emerging markets, including India.

Consumer prices in the US in April beat the forecast and rose the sharpest since 2009, intensifying the debate on whether the Federal Reserve should hike interest rates earlier than expected.

Rising inflation has also hit investor confidence, which was fuelled by continued stimulus by major economies. On Wednesday, the S&P 500 index fell the most since February and bond yields rose.

 Analysts, however, said that the Federal Reserve would not be in a hurry to hike rates as the employment numbers in the US have not improved.

 Last week the US reported adding 266,000 new jobs for April, much less than the predictions by various agencies.

 "I will be surprised if the Fed chairman talks about increasing rates before jobs data improves. If inflation continues to rise over the summer months, there is the Jackson Hole finance ministers meeting. That would be the point when the Fed would say something. Until then, I don't think the Fed will say anything to roil the markets,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

Holland further said one has to look at the data for May and June to see if the inflation pressure eases. "We have to see if it is going to be more sticky inflation. If the May data is better, these fears will go away."

 Some analysts said that correction at this juncture would be healthy for the markets as it had rallied a lot since March last year. "The market won't wait for the Fed; bond yields will spike and that will affect the equity markets across the world. And that will provide ground for correction," said Jyotivardhan Jaipuria, founder, Valentis Advisors.

 Apart from inflation worries, the Covid situation in India is also worrying investors. On Thursday, India reported 362,727 new infections, with over 3.7 million active cases.

Analysts said the markets would bounce back quickly ev­en if the cases come down gradually. Despite enhanced mobility restrictions by states, manu- facturing and infrastructure activities have not halted yet.

 Analysts said the key to a bounce-back in the markets would be speedier vaccination.

 "We see the number of cases fall but not drastically at the moment. And if we get the vaccination programme running, the markets will be a lot happier. What the governments in the US and the UK did was getting the vaccination programme up and running. And that's why they are reopening very quickly. Foreign investors may not want to rush to India until they see evidence on vaccination,” said Holland.