Sensex, Nifty tumble 2% on Federal Reserve's steep interest rate hike

India’s equity markets extended their rout on Thursday, along with international peers, as investors fled risky assets on fears of a global recession after the US Federal Reserve raised its interest rates by 75 basis points — its biggest increase since 1994 — and signalled another big hike next month.

The initial rally seen after the Fed announcement — on Wall Street on Wednesday and in Asian markets on Thursday morning — faded as investors braced for a hard landing of the economy. The Sensex had risen 600 points in early trade and later plunged over 1,700 points from the day’s high.

The Sensex ended the session at 51,496 with a decline of 1,045 points, or 1.9 per cent. The Nifty, on the other hand, slumped 331 points, or 2.1 per cent, to settle at 15,360. 

Both indices have declined 7 per cent after the five consecutive days of fall and have ended at levels last seen in May last year. On Thursday, over Rs 5.5 trillion of market cap got wiped out. On a year-to-date basis, India’s m-cap is down Rs 27 trillion to Rs 239.2 trillion.

Foreign investors sold shares worth 3,257.65 crore on Thursday, taking their year-to-date selling tally past the Rs 2-trllion mark.

The US markets were trading in the red as of 9 pm IST on Thursday, with the Dow Jones and the S&P500 falling 2.3 per cent and 3 per cent, respectively. The tech-heavy Nasdaq was down 3.7 per cent.

“We continue to believe that when push comes to shove, the Fed compromises, pushing up the unemployment rate more than their forecast assumes and accepting underlying inflation of up to 3 per cent,” Ethan Harris, global economist, BofA, said in a note.

The Fed’s expansion of balance sheet and low rate setting in the wake of the pandemic in March 2020 had led to a massive rally in risky assets. However, the Fed’s move to stamp out inflation is leading to a sharp reversal in fortunes.

“There is no precedent of the liquidity pump which has happened in the last two-three years. More than interest rates, it is the liquidity withdrawal which is affecting sentiment. The doubling of the indices was fuelled by liquidity,” said UR Bhat, co-founder of Alphaniti Fintech.

While speaking to reporters on Wednesday, Fed Chairman Jerome Powell maintained that the Fed's objective is to bring inflation down, and conceded that many factors beyond its control are in play, such as the Russia-Ukraine war and its impact on energy and food prices.

"A close reading of the commentary reveals that the Fed is planning to hike rates quickly, though not as big as we saw on Wednesday. Though the commentary was not as hawkish as feared, it is sufficiently hawkish to make investors nervous. Oil prices have not gone down. Some progress on a truce between Russia and Ukraine is important. All the key support levels have broken for the benchmark indices today,” said Bhat.

Analysts said the current backdrop, where growth is slowing, earnings are falling, and prices are rising, spells trouble for stocks. Only 558 stocks advanced on the BSE, and 2,826 fell. Over 300 stocks ended at their 52-week lows.