Markets surge after Fed signals slower rate hikes; Sensex up over 1,000 pts

Indian markets rallied on Thursday after the US Federal Reserve raised interest rates by 75 basis points (bps) for the second straight month and showed a strong desire to curb inflation. Risk appetite, however, got a boost on optimism that the US central bank would slow the pace of monetary tightening.

The Sensex closed at 56,858 with a gain of 1,041 points, or 1.9 per cent — the biggest single-day gain in two months. The Nifty rose 288 points, or 1.7 per cent, to end the session at 16,929. Both indices closed at their highest level since May 2.

Investor sentiment was also buoyed by Fed chief Jerome Powell's statement that he did not believe that the US economy was in recession, citing a strong labour market. He said future hikes would be guided by data.

On Thursday, foreign portfolio investors (FPIs) bought shares worth Rs 1,638 crore, while domestic investors, too, remained net buyers to the tune of Rs 600 crore. FPIs have sold shares worth Rs 1,462 crore in July so far, as against Rs 50,202 crore in June and Rs 39,993 crore in May.

“Markets liked the Fed chairman's statement that they will be driven by data going forward. Data takes time to come through. So if the Fed does one more hike and then looks at what impact it is going to have, we are effectively looking at a hold from October,” said Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

“There is a lot of pessimism in the market, so there was a lot of short covering as well. Investors will be watching whether there will be any unintended consequences of rate hikes and balance sheet reduction in the coming months,” Holland said.

Investors will be tracking whether the Fed can slow the pace of hikes or if inflation pressures would arm-twist the US central bank to announce another super-sized hike.

Rising prices had forced the Fed and other major central banks across the globe to embark on a policy of aggressive tightening after terming inflation as transitory last year. Recently, the European Central Bank announced a 50-bp hike, its first hike in more than a decade.

The US consumer price index in June rose 9.1 per cent, hitting a four-decade high. Rampant price rise is eating into corporate earnings and raising economic distress globally.

High inflation had even led to speculation that the Fed might go for a 100-bp rate hike. This had triggered a major sell-off in global equities and huge capital outflows, with Indian markets dropping to their lowest level in 13 months on June 17. Since then, the Nifty has rallied 11 per cent, with selling by FPIs easing and yields on the 10-year US Treasury cooling off.

Experts said turbulence seen last month could return once again if the markets get their inflation and rate hike projections wrong.

"Inflation is still running amok. Markets had expected the worst from the Fed. And the Fed not going for a 100 basis point hike was a big relief. The statement was less hawkish. The hard facts about quantitative tightening and price rises remain. Today was a relief rally. I don't think the gains are sustainable," said UR Bhat, co-founder, Alphaniti Fintech.

Besides the economic data, investors will also turn their attention to corporate earnings to gauge the impact of inflation and growth slowdown.

Four-fifths of the Sensex constituents ended with gains. Bajaj Finance rose 10.7 per cent and was the best-performing index stock. The market breadth was strong with 1,830 stocks gaining and 1,510 declining. Bharti Airtel was the biggest loser for a second day in a row amid concerns over high 5G spectrum spends.