Sensex Drops 800 pts, Nifty at 52-Week Low; Why is Market Falling Despite Dovish Fed?

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After four days of back-to-back losses, benchmark equity indices rose in Thursday’s morning session as dovish commentary by US Fed chair Jerome Powell boosted sentiments but the rally was short-lived. Gains fizzeled out soon, around 1:50 pm, The BSE Sensex was down 800 points around 51,700-level, while the NSE Nifty skid near the 15,400-level.

The Federal Reserve announced the most aggressive interest rate increase in nearly 30 years, raising the benchmark borrowing rate by 0.75 percentage points on Wednesday as it battles against surging inflation. The Fed’s policy-setting Federal Open Market Committee reaffirmed that it remains “strongly committed to returning inflation to its 2 per cent objective” and expects to continue to raise the key rate.

However, soon the sentiments turned around and the benchmark indices fell from day’s high to trade in the red.

Why Is The Stock Market Falling?

Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, “More than the 75bp hike in Fed funds rate, which was expected, it was the Fed chief comments and guidance that have calmed the markets, temporarily. Jay Powel’s remark that “we have the tools and resolve to achieve price stability” reflects confidence in containing inflation. His guidance of 3.4 per cent rate by end of 2022 and 3.8 per cent terminal rate in 2023 refect the determination to fight inflation. However, the presently unknown factor is whether the rising rates will tip the US economy into recession.”

Also, the Fed’s plan to shrink its nearly $9 trillion balance sheet have begun, with the central bank letting bonds mature off its balance sheet without replacement.

Data showed foreign investors have sold equities to the tune of Rs 19,2104 crore so far this calendar. This includes Rs 24,949 crore worth of stocks FPIs sold in June so far. In its May 4 meeting, Fed had raised short-term interest rates by 50 basis points. The increase followed a 25 basis point hike in March 2022.

Experts said that the Fed reducing the size of its balance sheet will have a negative impact on global markets.

“Along with the highest rate hike in 28 years, Powell delivered the clear message that the Fed has the tools and resolve to achieve price stability. Also, the Fed is significantly reducing the size of its balance sheet. This has negative implications for equity markets globally. Any relief rally is unlikely to last long. In India, the sustained FPI selling is an additional headwind,” said Vijayakumar added.

In a note this week, Nomura said Fed will likely need to move rates more deeply into the restrictive territory and that it expected a terminal rate of 3.75-4 per cent by March 2023, followed by cuts in 2024. The brokerage expects the balance sheet runoff to continue through 2023.

What Should Investors Do Now?

“Investors may follow a cautious investment strategy without taking aggressive bets. Take a long-term view and use dips in the market to slowly accumulate fairly priced high-quality stocks such as leading banks, leading IT, pharma and select autos,” Vijayakumar said.

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