Equity markets are likely to come under pressure on Thursday following the US Federal Reserve’s decision to increase interest rates by 0.25% and signal a faster rate hike going ahead, which could drive more foreign fund outflows.
The US Fed expectedly raised interest rates around midnight on Wednesday, but also indicated that the current once-a-year pace of rate increases will accelerate next year.
The Fed’s stance on faster rate cuts comes amid strengthening US economic parameters like job gains and falling unemployment rates. President-elect Donald Trump’s plans to boost the US economy through tax cuts, spending and deregulation. He is also likely to boost inflation, which could push faster rate hike.
“It appears to be Fed’s response to the incoming administration’s stated pursuit of strong reflationary policies and fiscal stimulus impacting medium term inflation outlook. Emerging market currencies and equities may come under pressure and bond yields may rise with the higher number of rate increases by Fed in 2017,” said Ajay Bodke, CEO and chief portfolio manager, Prabhudas Lilladher.
The SGX Nifty futures were trading down 66 points or 0.8% in the morning. Elsewhere, the US markets ended over 0.5% lower and Asian markets were largely trading lower with the Hong Kong’s Hang Seng down 1.5% and Singapore’s Straits Times declining near 1%. On Wednesday, the BSE Sensex had ended 95 points down or 0.4% at 26,602.84.
The Fed rate hike comes at a time the Indian economy is already grappling with uncertainty following the government move to ban Rs 500 and Rs 1,000 currency notes. The factory output also declined 1.9% in October, data showed.
Foreign institutional investors have been net sellers from India’s equity markets in the last few months. In October, FIIs sold equity worth Rs 4,306 crore, in November they pulled out 18,244 crore and so far in December, they have sold Rs 259 crore. Since Jan 2016, FIIs have bought equity worth Rs 28,485 crore, while pulling out Rs 42,761 crore from debt markets.