US Fed puts markets on the slippery slope; Sensex falls 581 points

Rate hike signal intensifies sell-off; Sensex down 6.5% in 7 sessions

Investors continued to pull out of risky assets as US Federal Reserve officials signalled that they were on course to raise interest rates in March, citing high inflation.

The Sensex dropped as much as 1,419 points, or 2.5 per cent, on Thursday before recouping some of the losses. After a wild ride, the 30-share index closed at 57,277, down 581 points, or 1 per cent. The Nifty, after dropping to a low of 16,867, ended at 17,110 with a decline of 167 points, or 0.9 per cent. Foreign portfolio investors sold shares worth Rs 6,267 crore, while domestic investors were net buyers to the tune of Rs 2,881 crore.

Most global markets slumped as the Fed took a hawkish stance. The Fed’s commentary after its two-day policy meeting prepared ground for higher rates, with Chairman Jerome Powell saying America’s strong economy may no longer require monetary support.

The US central bank has left rates unchanged at near-zero since March 2020 in a bid to boost the economy battered by the Covid-19 pandemic. The Fed’s ultra-low rates, coupled with its bond-buying programme, have bolstered risky assets like the equity market and cryptocurrencies. Now, its decision to reverse some of these stimulus measures has put investors and equity markets in a tight spot.

“The Fed is clearly looking through Omicron and will not react to weak data for January and February... Bottom line, the risks are skewed to more than four hikes this year,” said Ethan Harris, head of global economics research, Bofa.

“The Fed has made up its mind that a rate hike could be as early as March, and the tightening will continue. Markets were hoping that there would be some moderation on tightening or hikes due to the surge in Omicron. They have made it clear that sticky inflation is unacceptable. Moreover, there is some volatility ahead of the Budget," said U R Bhat, co-founder, Alphaniti Fintech.

The Nifty and the Sensex have posted declines in six out of the previous seven trading sessions, dropping over 6.5 per cent each. Foreign portfolio investors (FPIs) have yanked out over $7 billion in just seven sessions amid rising bond yields.

The sentiment was also hit by the rise in crude oil prices due to geopolitical tensions in West Asia, and between Russia and Ukraine. Brent crude was trading at $89.53 a barrel, the highest since October2014. The 10-year Indian government securities yield was at 6.7 per cent, the highest since December 2019.

“Expecting great returns from equities in 2022 is unreasonable after the huge gains last year. A good Budget and election results can give marginal impetus to the market. But it is not going to be a great year in terms of returns,” said Bhat.

Analysts said the prevailing earnings season and the upcoming Budget would cause a lot of volatility in the markets.

On Thursday, the market breadth remained weak, with 1,946 stocks declining and 1,422 advancing. Around 363 stocks were locked in the lower circuit. More than two-thirds of the Sensex stocks declined. HCL Technologies fell 4.2 per cent and was the worst-performing Sensex stock. Infosys fell 2.5 per cent and contributed the most to the index’s losses. IT stocks fell the most and their index declined 3.1 per cent on the BSE.