Markets hold nerve after US Fed action

Indian equities, currency and bond markets heaved a sigh of relief, along with other global markets, following the US Federal Reserve’s dovish statement and its indication it wouldn’t rush to raise interest rates from their current near-zero levels.

Stock markets, however, failed to hold on to gains as investors turned edgy due to the lack of positive domestic triggers and weak earnings forecast. The rupee, however, ended higher against the greenback, though the gains were trimmed as the Reserve Bank of India (RBI) was seen intervening via state-run banks to mop up dollars.

The Fed on Wednesday dropped the pledge to remain “patient” in its outlook towards monetary tightening, paving the way to end the ultra-low-interest-rate era.

However, most global markets, which had turned cautious ahead of the Fed meeting, cheered the US central bank’s decision to tread cautiously in tightening monetary policy due to weakened growth and inflation forecast in the world’s biggest economy. Following the Fed’s overnight statement, the benchmark Sensex, too, gained more than 350 points, or 1.2 per cent, the rupee climbed to a two-week high and yields on the 10-year benchmark Indian government bonds softened.

But the market gave up all the gains ahead of the close as traders rushed to book profits amid resurfacing fears of Greece exiting the euro zone.

“The Indian market failed to sustain gains due to the lack of positive triggers in the near term. Not much is expected till the March quarter earnings announcement. The market will continue to trade negative to range-bound,” said U R Bhat, managing director at Dalton Capital Advisors.

The Sensex came off over 550 points from its day’s high of 28,978.74 and the rupee & bond markets, too, pared gains due to the sudden risk aversion. European stocks, which had advanced to their highest levels since 2000, also retreated due to a jump in Greek bond yields.

The Sensex declined 152 points, or 0.53 per cent, to close at 28,469.67, its lowest since February 10. The National Stock Exchange’s 50-share Nifty index closed at 8,634.65, down 51.25 points or 0.59 per cent. Banking stocks, including as State Bank of India and ICICI Bank, and index-heavyweight Reliance Industries contributed to most of the losses.

Market players said the uncertainty surrounding the timing of the rate rise is over for now, which could help calm volatility in the market.

“Just because we have removed the word patient from the statement does not mean we are going to be impatient,” Fed chair Janet Yellen said at a press conference. “Incoming data pertaining to the first quarter [reveal] that real GDP growth has declined somewhat below where it was for the last several quarters of last year… There has been a slight downgrading of estimates of growth for this year,” she said, hinting the near-zero interest-rate regime may not end soon.

“The Fed has dropped ‘patience’ from its forward guidance, which had come to be understood as no rate hikes for the next couple of meetings,” said ICICI Bank Global Markets in a note.

Analysts predict turbulence in the financial market when the Fed lifts rates later this year. The move could lead to flight of capital from riskier assets like emerging markets back to the US.

The rupee ended higher against the dollar, though some of its gains were trimmed as the Indian central bank was seen as intervening via state-run banks to mop up dollars. RBI has been mopping up dollars to boost its reserves. “There was Reserve Bank of India presence in the currency market. They were seen mopping up dollars. This month, the rupee will trade in the range of 62-63 per dollar because ahead of the financial year closing, dollar demand from companies may be there,” said Sandeep Gonsalves, forex consultant and dealer at Mecklai & Mecklai.

Latest data show after rising for five consecutive weeks, RBI’s foreign exchange reserves fell $ 286.3 million to $ 337.79 billion in the week ending March 6.

RBI governor Raghuram Rajan said on Wednesday in New Delhi the country was prepared to deal with the consequences of a US Fed interest rate rise, including heightened market volatility. Rajan also said foreign exchange reserves were “comfortable”, and the current account deficit was under control.

The yield on the 10-year benchmark bond ended down three basis points (a basis point is a hundredth of a percentage point) compared with the previous close, tracking gains in the rupee after the US Fed said they were in no rush to raise interest rates. The yield on the 10-year bond ended at 7.76 per cent.