The US Federal Reserve’s policy decision that could shut the door on further rate cuts in the near future roiled markets on Thursday, with currencies, bond yields and equities across the world feeling the heat. The global meltdown saw the Sensex falling almost 1,000 points, the rupee dropping below 85/$ and 10-year bond yield hardening by 4 basis points to 6.79%.
While the Fed reduced its benchmark interest rate by 25 bps, chairman Jerome Powell said, “With this action, we are significantly closer to the end of our easing cycle, but additional adjustments will depend on incoming data and evolving economic risks.”
Looking ahead, the Fed now anticipates just two 25 bps rate reductions by the end of 2025, down from the four projected in September. This drove the Dow Jones to log its longest losing streak since 1974.
All three indices in the US—Nasdaq, S&P 500 and Dow Jones—fell over 2.5% each. Even Euro Stoxx, FTSE-100 and CAC 40 were down over 1.4% each.
However, India did better than most major countries. The Sensex fell 1.2% to close at 79,218 points—the first time below 80,000 points since November 29. The Nifty closed at 23,952, down 247 points or 1.02%.
The Sensex has lost 3.55%, or 2,915 points, in the last four trading sessions, eroding investment wealth of over Rs 10 lakh crore (in three sessions).
The rupee, which has been on a steady decline since September 24, when the Fed cut rates for the first time, closed at 85.08/$ (down 0.14%) as the dollar index, which measures the dollar against the basket of six major currencies, hit a 2-year high of 108.07. Many other Asian currencies fared worse, with the Chinese renminbi falling 0.16% while the Indonesian rupiah and Japanese yen declined 1.23% and 1.25%, respectively.
The 10-year bond yield also rose 4 bps to 6.79%, tracking US bond yields that rose 11 bps to 4.51%. In addition, the interest rate difference between US bond yields and India narrowed to 227 bps—the lowest since March 2006—prompting foreign portfolio investors (FPIs) to pull money out of the domestic market. Given the pressure on currencies across Asia, traders said that the Reserve Bank of India was circumspect about intervening too much.
Nilesh Shah, MD, Kotak Mutual Fund, said, “Our markets reacted in line with the global correction, as the US Fed shut the door on rate cuts in the near term with increased uncertainty. Also, emerging market currencies, including the rupee, seem to be the preferred trade among the speculators.”
While the immediate trigger for the fall came from the US, experts say that the market is reacting to the slowdown in the domestic economy as well.
Shankar Sharma, founder, Gquant Investec, said, “For one, this was a reaction to the overnight fall in the US. However, this is not the only explanation. The market is now beginning to wake up to the reality of a slowdown in the Indian economy, along with slowing corporate earnings and a widening trade deficit. Therefore, the markets are reacting, and so is the rupee.”
Going forward, experts see the markets being under pressure for some time. However, with the Christmas holidays just around the corner, FPI action is likely to be muted. This could mean that the Indian stock market could get some breather from the selling pressure from them. However, until US President-elect Donald Trump’s policy decisions, including tariffs and others, become clearer by the end of January-end, markets are expected to stay nervous.