What Fed Rate Hike Of 25 Basis Points Could Mean For Indian Markets

The Federal Reserve has hiked interest rates by 25 basis points. This is in line with expectations from the markets and brokerages. Caught between financial stability and fighting inflation, the Fed has struck a balance. It has reassured the markets with a categorical remark "US banking system is sound and resilient’’.

The Fed also acknowledged the current banking crisis will lead to "tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain".’ While the U.S. markets were initially excited by the change in language from "ongoing rate increases’’ to "some additional hikes maybe based on incoming data’’ and were taking heart from the fact that Fed has signalled it could be nearing the end of rate hikes, it was short-lived. The bottom line seems to be that inflation is still too high and more interest rate increases are needed.

The Fed chief began the press conference by saying the banking system is sound, and he emphasised the steps the central bank took to provide liquidity. But he said there is still considerable uncertainty over how much the banking disruptions will tighten lending conditions and slow the economy. The other straw on the camel's back was Janet Yellen saying that the administration was not considering expanding bank deposit guarantees beyond the current limit of $250,000, as some investors was hoping such an expansion would help prevent the crisis from spreading further.

For India, could this be is a very important change but not strong enough to trigger a big bullish shift? Normally, such a policy could lead to short covering rally. Part of this was seen over the last couple of days when banks started rallying. However, the tug of war between the bulls and bears will continue resulting in volatility.

The markets have been gripped by nervousness, fear and uncertainty ever since the Silicon Valley Bank crisis hit the headlines. While SVB’s depositors were bailed out, the markets had to deal with another, bigger crisis with Credit Suisse. UBS and the Swiss National Bank bailed out Credit Suisse.

This was followed by six central banks taking a coordinated action to provide liquidity support to the banking system. Fears subsided, but uncertainty continued. There emerged some semblance of hope that the contagion has been contained.

The table below shows how Indian markets swung between fear and hope over the last couple of weeks. But as far as IT stocks are concerned, it has been only fear and there are no signs of relief.

Just when the markets were coming to grips with the issue of high valuations of IT stocks, the global banking crisis surfaced. This triggered doubts over the impact of BFS (banking and financial services) business for Indian IT companies. Hence, the relentless fall. The Nifty IT has seen an erosion of over 9% in a month and nearly 21% in a year.

But insofar as the Nifty is concerned, it is the Bank Nifty that has been the key accelerator in the downward spiral and is also the fastest to swing back in the hope the Fed will change course and stability could return to the global banking system. From its March 15 low, the Bank Nifty has rallied by 2.4% though it is still down by 10% over a year.

While the markets are not sure how IT stocks will behave, the bets seem to be on banking stocks. After witnessing significant outperformance in 2022, banking stocks started witnessing correction since the beginning of 2023.

According to analysts that BQ Prime spoke with, the buy-on-dips strategy works well for banking stocks. Banks could be the biggest beneficiaries of the next leg of the rally. Indian banks are considered better placed in terms of quality of assets and interest rate risks. They point out valuations are still below their peak and fundamentals are still quite solid.

But given the uncertainty over how banking stability will be restored, markets could witness alternate bouts of selling and buying. Understandably so, given the unfolding events.

The RBI’s policy decision will come up in April which also coincides with the earnings season. The uncertainty over monsoon, in the backdrop of El Nino, will play its part till the clouds are clear. Earnings season will begin and the real test of resilience and growth will be seen.

Lastly, the first month of the financial year begins with a number of economic challenges leading up to the general elections.