US Fed signals grand finale of rate hikes. How it may impact Nifty bulls

Other than Fed chair Jerome Powell’s statement implying that there’s a good chance this was the last hike of the cycle, the rally is likely to be sustained in the near term by weakness in crude oil prices, dip in bond yields and RBI’s recent pause in rate hikes.

The Street is, however, expecting the Fed’s first rate cut in September 2023 but global brokerage firm BofA sees it happening only in March 2024. “Any disappointment on rate cut expectations could drag markets in 2HCY23,” BofA head of India equity research Amish Shah said.

The brokerage has recommended clients to book profits in the Indian market as the US recession looks imminent.

“We see no upside to our Nifty year-end target of 18k; would look to book profits. That said, we would advise buying potential market dips (Nifty at 16k, 11% downside) on strong domestic flows, weak FII positioning and resilient India macro,” said Shah.

From a market perspective, analysts say more important than the expected dovish rate hike of 25 bps by the Fed was Powell’s comment that the case of avoiding a recession is more likely than having a recession. The market is likely to remain resilient with limited volatility, said Dr. V K Vijayakumar of Geojit Financial Services.

The possibility of a soft landing for the US economy is also being seen as a positive trigger for IT stocks, which have been on the backfoot on concerns of poor orders from the US.“The strength of the rupee and the continued buying by FIIs will impart strength to the market. High-frequency indicators in India reflect a resilient economy with improving earnings prospects. The sharp decline in crude is an extra bonus to the macro economy and benign for segments like paints, adhesives and tyres,” Vijayakumar said.

Some investors were left confused by Jerrome Powell’s commentary because he hinted at a pause but gave no sign of a rate cut in the future.

“He was not much concerned about the recession, while on the other hand, regional banks are facing strong selling pressure. The US market reacted negatively to it, but there is a sharp fall in crude oil prices, US bond yields, and the dollar index, which are positive for emerging markets,” said Santosh Meena, Head of Research, Swastika Investmart.

Technically, 18181–18230 is seen as a critical supply zone for Nifty, where we can expect some pullback, but bulls will remain in the driver’s seat till the index holds 17,770 level.

Sunil Damania, Chief Investment Officer, MarketsMojo, said the rate hike is likely to complicate the situation given the current state of the banking industry in the US.

“It is our belief that this will be the final rate hike from the Fed this year, and there is a high probability that the Fed will begin reducing interest rates in the second half of 2023. The US banking industry’s current state is far from satisfactory and could pose problems for the global equity market,” he said.