Understanding the Hawkish Stance of the US Fed & Its Impact on the Indian Stock Market

What does Hawkish mean?

• The US Fed cut interest rates by 25 BPS, bringing the rate range to 4.25% - 4.50%, indicating only two rate cuts in 2025.
• "Hawkish" refers to the FED keeping its focus on controlling inflation even if this means keeping high interest rates for longer than expected.

Why is the Market Reacting Sharply?

• Markets expected more rate cuts. But with the FED slowing down, it spooked the markets. Major US indices, like the S&P 500 and Dow Jones, faced their worst decline. This sell-off quickly spread to emerging markets.
• Sensex and Nifty opened down by more than 1% today, continuing their fall. A hawkish stance from the FED would make riskier assets such as Indian equities less attractive when US interest rates remain elevated or the USD gains strength.
• In a week, FPIs sold an amount to the tune of ₹80.06 billion in Indian stocks!

Stronger Dollar = Weaker Rupee?

• The FED’s policy has pushed the DXY to a 2-year high. A stronger dollar makes US assets more attractive and causes the Indian rupee to depreciate.
• This spells trouble for India’s economy, how?
  • Higher import costs due to the weaker rupee could widen India’s trade deficit.
  • Inflation risks increase, as imported goods become costlier.

Who’s Hit the Hardest?

• Real Estate: Higher interest rates may stab the demand for housing.
• Automobiles: Sales could slow due to higher financing.
• Capital Goods: Starting new projects might come to a standstill.

It might rain cats and dogs on the broader markets, but IT and pharma could gain here:

• A stronger greenback brings more revenue to these companies, as they get a significant part of their income in US dollars.
• Indian IT giants like TCS, Infosys, and Wipro may see a continuation in higher earnings vis-a-vis the overall lowering pace in the market.

How Would it Impact Nifty & Bank Nifty?

• Nifty might witness selling pressure due to FII outflows and dips in sectors such as Real Estate and Capital Goods, while IT and Pharma may be able to provide a bit of relief.

• Bank Nifty appears to be more vulnerable because of higher interest rates coupled with weaker loan demand.

If outflows by foreigners persist, recovery in the Indian market could take a beating. Fickle investors must brace themselves for higher volatility still in sectors with excessive foreign investor participation.