The Fed move

US stocks surged Wednesday after the Federal Reserve announced it would hold its target rate steady at the conclusion of its two-day monetary policy meeting. This was the second meeting in a row that the central bank has opted not to increase its benchmark lending rate, allowing the economy to continue to absorb the effects of higher borrowing costs. Federal Reserve Chair Jerome Powell said in a post-meeting press conference that the central bank would continue to review economic data and proceed carefully with rate moves amid a strong economy. This was followed by a rally in India stocks as well continuing till the last of the week. Obviously the interest rate ramifications in the US have an impact in India.

Is this a signal that the interest rate hiking cycle is ending?

Or at least signalling a pause? This was the main question everyones lips as the policy statement became public. This would also signal a boost to asset markets across the world. More importantly the significant outflow of FPI money from India on the back of rising US interest rates was a continuing worry. Indian investors can breathe a sigh of relief if the rate cycle indeed is slowing down if not reversing. This could mean higher inflows back into emerging markets and to India in particular. The current situation with near 5% yield for US 10-year treasury bills represent a challenge for allocation to other markets, especially India. Indian bond yields for the first time are quite close to the US.

What does this mean for the Indian Capital markets?

While the short term has given a quick rally we should be careful of a couple of counts. Where is inflation likely to settle? What follow up moves does the US Fed adopt? While the markets in the US have been fighting the US Fed for so many months, for the first time, markets appear to be heeding the signals. This is going to help the US Federal Reserve in the coming months in its bid to tame inflation and restore some semblance of normality in the markets. We should expect at least some easing of monetary pressure and in turn slightly benign asset markets at least going in to the end of the month and into the holiday season.

Indian corporate earnings continue to remain robust and most companies reporting so far have put up a good show. The guidance of IT companies has been cautious but the earnings themselves do not show any pricing or volume pressure yet. Indian manufacturing and consumer durables companies continued to post robust results and this makes for a reasonable period in the equity markets. Bond market too appear to be much relieved following from the move from the Fed and we expect rangebound fixed income markets for the interim.