The recent Fed mood pleases Indian Stock Market

Uncategorized

The Fed strives to achieve the twin objective of keeping Inflation under a sustainable level of 2 per cent and maintain stability in the Labor Market. And this is not easy to balance these two mutually contradictory goals always. But Fed seems to have been successful in keeping inflation at reasonable level in the year 2023 with things also going good in the labor market as well. However, it is the fifth consecutive meeting with no change to interest rates after raising rates eleven times between 2022 and 2023 and this has gone well with the Indian stock market sentiments.

Resilience observed in the US economy

The consumer price inflation increased at 2.4 per cent in the US over a period of 12 months ending January and this was impressive as compared to the peak of 7.1 percent in the year 2022. The core PCE price index increased by 2.8 percent in the same period. The core personal consumption expenditures (PCE) inflation decreased to 0.1 percent on a monthly basis in January as compared to an average 0.3 per cent in the preceding quarter and as per the reports, the PCE inflationary pressures are likely to be around 0.3 percent in the month of February. CPCE is indicative of the future expectation of inflation. And currently it is giving an indication of the inflation getting back to the threshold of 2 per cent being the targeted inflationary level.

The additional US economic data released recently has reported that the three-month average job gains have been around 265,000 which is considered as strong with the February gains zooming past this average at 275,000. This was higher than what was expected earlier and much better than 229,000 in the month of January as reported by the US Bureau of Labor Statistics. Higher growth rate was achieved in construction, retail and food services jobs which majorly contributed to the surprising gain in employment in February.

Over the last year inflation has eased substantially and the best part is that the softening of inflation has occurred without a significant increase in unemployment. The labor market remains relatively tight, with the unemployment rate quite close to historically low levels and job vacancies remaining elevated. Real gross domestic product (GDP) growth has also been strong, supported by solid increases in consumer spending.

Fed decides to keep the policy rates same but showed confidence about inflation getting back to normal

Even as the recent indicators in the US suggest that economic activity has been expanding nicely, job gains have continued to remain strong, and the unemployment rate has been low and Inflation has eased out, the Fed preferred to keep the policy rates unchanged. The FOMC has maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent since its July 2023 meeting. In a related action, the Board of Governors of the Federal Reserve System approved that the primary credit rate shall remain at the existing level of 5.5 percent.

The Fed rate has maintained its status quo probably in view of the high attention given to the inflation risks which if allowed to go to higher levels, it may impose significant hardship, especially on those least able to meet the higher costs of essentials. Hence the main focus of the Fed is to bring inflation back to its 2 percent level and its monetary policy statement affirms that since inflation rate is moving sustainably toward 2 per cent, there is no need to adjust the target range.

Fed mood brings cheers in Indian Stock Market

Fed’s stance on its monetary policy sent positive global signals and they were well received by Indian equity markets as well. Both Sensex and Nifty ended the session higher driven by the US Federal Reserve’s decision to maintain interest rates while holding out on outlook for three cuts in borrowing costs this year. Moreover, the Fed has expressed confidence about inflation returning back to the threshold of 2 per cent even as labor market seemed going strong.

It was a coincidence that the same day The HSBC India Composite PMI Output Index rose from 60.6 in February to 61.8 for the month of March and it was like double delight for the equity markets. By the Closing time at  3:30 p.m., the BSE Sensex surged 539.50 points or 0.75% to 72,641.19, while the NSE Nifty rose 172.85 points or 0.79% to 22,011.95. All NSE sectoral indices traded positively.

The US stocks were also maintaining a positive trend closing around 1% higher. Equities in the Asia Pacific region also surged, with Japan’s Nikkei hitting a record high. And this only sustained the positive market sentiments in India.

A rate cut by the Fed is viewed favorably by the investors in the Indian equity market as lower interest rates mean decrease in borrowing cost for businesses and improved profit and help them to go for enhanced scale of operations and to diversify.

Moreover, Fed rate cuts may enthuse foreign capital inflows into emerging markets like India. Particularly when the domestic outlook of the Indian economy remains strong, a possibility of the rate cuts improves the prospects for foreign capital inflow which can lead the market rally to new highs.