Firm interest rates, inflationary pressures to keep bourses volatile

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Mumbai, June 25: The possibility of a further hardening of interest rates globally and the mounting of the inflationary pressure is expected to have an adverse impact on the securities market. Both the leading bourses may continue to be volatile due to these two developments, market players opined. The US Federal Reserve would meet on June 29-30 to discuss a further rate hike. The financial market experts are expecting a Fed rate hike of another 25 basis points, from 5% to 5.25%.

The earlier Fed rate hike of 25 basis points, from 4.75% to 5% on May 11 had witnessed a bloodbath in the Indian market. The Bombay Stock Exchange (BSE) Sensex has dipped by 22% or 2,811 points since then at 9,810 points between May 10 and June 9. However, it has recovered a bit from the low levels over the last two weeks, to gain 6% or 591 points to close at 10,401 points on Friday last.

Dhirendra Kumar, CEO, Value Research, said that a further hardening of interest rates would not only hurt market sentiments but would also have a negative impact on the equity market.

The interest rate hike may lead to a liquidity strain in the market. Apart from the interest rate, the price rise (inflationary pressure) due to the oil price spike is another matter of concern, he said. It may be mentioned here that the government announced higher inflationary figures. Inflation has gone up from 4.72% to 5.24% for the week ended June 10. This is expected to harden the interest rate and put pressure on the corporate earnings.

The hardening interest overseas may suck away foreign funds from the domestic bourses, which will again have its adverse impact on the bourses. FIIs have pulled out more than $2 billion from the domestic market since the May 11 Fed rate hike.

Striking a different note from this, Sandeep Shenoy, strategist and head of research, Pioneer Investment, said that the interest rate hike by the Federal Reserve in May has already been factored into the market movement. A majority of the stocks are now fairly valued. "So, I do not think that in case of another Fed rate hike, we will see another big sell-off by FIIs".