Fed signals to steer equity market

US interest rates will determine fiis inflows

The Indian equity market is expected to be range bound in the near term but the sentiment has definitely taken a beating. The focus is now on the outcome of the Federal Reserve meeting on Tuesday as nervous investors tread cautiously, analysts said.

Foreign fund outflows have been a major concern here and in the other Asian markets with volatile oil prices also adding to worries, they added. Uneasiness over domestic corporate performance ""some disappointing quarterly results"" has added to the weakness, brokers said.

The US Fed is meeting this Tuesday to discuss monetary policy and is widely expected to hike rates by another quarter per cent, the head of research at a domestic brokerage house said.

Arun Kejriwal, investment strategist at Angel Broking, said, "The trend in the US interest rates is important and will determine foreign fund investments in most other emerging markets, including India."

Analysts said that emerging markets had received significant foreign fund inflows in the last two years as US interest rates had remained low, but the recent interest rates hikes could result in a significant reversal in foreign fund flows.

In fact, the outflow has already started. Foreign institutional investors have been net sellers of Indian shares to the tune of Rs 1024.30 crore in April 2005. Incidentally, the benchmark Bombay Stock Exchange fell almost 7 per cent from 6605 on April 1 to 6154.44 on April 29.

This, despite the fact that domestic mutual funds were net buyers to the tune of Rs 1,252.91 crore of equities. The market woulds have crashed much more had domestic fund flows too been negative, brokers said.

Moreover, this only the second time in the last two years that foreign fund outflows have occurred month after month.

The last time FII outflows (Rs 3,250.50 crore) has taken place was in May 2004, when the market tanked by almost 15 per cent. Dependence on foreign fund inflows is obvious and at these levels this will be more crucial, warn analysts. If domestic institutions and investors also join the bear party, we may be in for some torrid times in the market, they add.