Indices see wild swings after US Federal Reserve, RBI raise policy rates

After rising over 900 points in early trade, Sensex ends flat at session's end

It was a roller-coaster ride for the benchmark indices on Thursday as investors digested the Reserve Bank of India (RBI) and US Federal Reserve’s decisions to increase interest rates to combat soaring inflation.

Several stocks swung wildly as investors assessed the impact of aggressive tightening of monetary policy on economic growth and corporate earnings.

Following a three per cent up move in the US markets, the benchmark Sensex rose almost 900 points in early trade on Thursday. However, selling in the index heavyweights in the latter half of the session saw the index give up almost all the gains.

The Sensex ended the session at 55,702, with a gain of 33 points or 0.06 per cent. The Nifty ended the session at 16,682, a gain of 5 points or 0.03 per cent. Both the indices had posted their worst fall in two months on Tuesday after the RBI’s surprise 40 basis points rate hike.

Foreign portfolio investors (FPIs) sold shares worth Rs 2,075 crore, while domestic institutions were buyers to the tune of Rs 2,229 crore.

Sentiment was also hit as the US futures market indicated a weak opening on Wall Street on Thursday as inflation fears resurfaced. On Wednesday, the S&P500 jumped 3 per cent after US Federal Reserve Chairman Jerome Powell quashed rumours about the US Fed considering a 75-basis-point rate hike in the coming months.

The US Fed raised interest rates by 50 basis points for the first time since 2000 and indicated that it may make similar moves in the next couple of meetings. The US central bank also unveiled plans to shrink its balance sheet. However, Powell’s comments that the Federal Open Market Committee is not actively considering a 75 basis points hike sparked a relief rally.

“The Federal Reserve’s rate hike was on expected lines. And the chairman’s statement assuages fears of a bigger rate hike. Hence, the impact on equities is not going to be very severe. In contrast, RBI’s rate hike announcement was unscheduled. The communication on the future course of action is a bit ambiguous, which rattled the markets on Wednesday,” said UR Bhat, co-founder, Alphaniti Fintech.

Andrew Holland, chief executive officer of Avendus Capital, said investors will have to brace for more volatility. “The tightening is going to start in June. The impact of that is going to start in July- September. Any intended consequences will start to show in September. The Bank of England is saying the economy could contract next year, and they still increase rates. That’s where the problem lies now.”

The rise in crude oil prices also affected investor sentiment in India. Crude oil prices have been rising over the last two days after the European Union announced its plans to phase out Russian oil imports in six months. Brent crude was trading at $113 at 1900 IST on Thursday, a gain of 2.75 per cent.

Going forward, analysts said earnings and global cues would determine the markets’ trajectory.

“With one of the major global events (Fed rate hike) now behind, markets should see some stability over the next few weeks. Despite the ongoing Russia-Ukraine war, tightening liquidity and supply chain disruptions, the market has been trading in a broader range. Domestic equities would continue to track global developments apart from the ongoing earning season for further cues,” said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services.

Some analysts said the current earnings season would not be bad because commodity prices started increasing in February. They expect pressure on margins amid a spike in Brent crude and other commodity prices to reflect in the June quarter earnings.

The market breadth was weak on Thursday, with 1,899 stocks declining and 1,448 advancing. More than half of the index stocks declined. IndusInd Bank fell the most amongst Sensex constituents at 4.32 per cent followed by Nestle, which declined 2.8 per cent. The BSE IT index gained the most at 1.8 per cent, while BSE Realty declined 1.6 per cent.