Indian stock markets were subdued ahead of an expected increase in the key policy rate by the United States Federal Reserve later today, tracking most Asian peers which were trading mixed, wary of the future course of action that the Fed chairperson Janet Yellen would take.
The US Fed is widely expected to raise the interest rates by 0.25 percentage points when it announces its June policy decision later today (6.00 pm GMT), but attention is on Janet Yellen’s commentary on the future outlook for monetary policy and the central bank’s policy on lightening its balance sheet.
“We remain mindful that more Fed officials have started referring to the rate hike stance as steady, not just gradual. They appear to be paving the way to start unwinding the balance sheet by the end of the year,” DBS Bank said in its morning research note on Wednesday. “The Fed had sought to normalize monetary policy in the past especially after an aggressive rate cut cycle, and after they are confident that the US economy has emerged from its crisis/recession,” the note added.
In India, the benchmark BSE Sensex erased early morning gains while the broader NSE fell below 9,600 the late morning today on account of selling pressure, mainly in metal stocks. The Sensex was trading down 24.49 points, or 0.08%, at 31,079 points, while Nifty was down by 14 points, or 0.15%, at 9,592.9 points in late morning. Overseas, Asian shares turned mixed, with Shanghai stocks easing 0.7%.
The third straight increase in the key interest rates by the United States Federal Reserve may stoke a flight of capital from some emerging markets to the United States. However, domestic factors including normal monsoon rains and implementation of GST — the most sweeping tax reform since independence — may help cushion Indian stock markets against wild shocks. Since the beginning of the year 2017, both BSE Sensex and NSE Nifty have surged 17% despite two back-to-back interest rate hikes by the Federal Reserve in December 2016 and March 2017.
Meanwhile, India’s wholesale inflation slowed to 2.17% during May as compared to 3.85% in April, raising hopes of a rate cut by RBI in its next monetary policy review meeting. In May, all commodities index fell 0.4% from the levels in April. Earlier this week, the data showed that the consumer price index inflation too fell to 2.18% — the lowest in a five-and-a-half years — for the month of May. Food inflation was in negative, with the retail food prices actually falling 1.05% in May from a year ago.
“Inflation is not only way below the medium-term goal of 4%, but also at the brink of testing the lower bound of the 2%-6.% targeted range. Hence, we revise our call to include a 25 bps cut in the repurchase rate in August and plateau thereafter,” DBS Bank said the research note.