Indian stocks decline on US central bank’s continued interest rate hike

Indian stocks fell during the morning trade on Thursday, mirroring weakness in US markets, which fell sharply overnight as the US Federal Reserve continued to tighten monetary policy to bring inflation to its target, despite continued volatility in the banking system due to the recent collapse of some banks.

Monetary policy tightening in the form of interest rate rises in advanced economies is harmful to India and other developing nations since investments tend to transfer to those advanced economies with fair and consistent returns on investments.

“U.S. stocks finished sharply lower in volatile trade on Wednesday after the Federal Reserve raised interest rates by another 25 basis points while noting that policymakers weren’t penciling in rate cuts this year. The decisions came despite recent stress in the banking industry following the collapse of two U.S. regional banks,” said Deepak Jasani, Head of Retail Research, HDFC securities.

By 9.22 a.m., the Sensex and Nifty were both down 0.5%, with all save the Nifty auto index trading in the negative. The US monetary policy committee raised the main interest rate by 25 basis points to 4.75-5.0 percent in order to achieve maximum employment and inflation at 2% over the long term.

“The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks,” the US monetary statement said, after the two-day deliberation that ended Wednesday (local time).

The Silicon Valley Bank, a prominent global leader in the field of technology companies, failed on March 10 due to a run on the bank, requiring the US federal government to intervene. Authorities closed the tech lender and transferred ownership to the US Federal Deposit Insurance Corporation (FDIC).

With the latest rise, the committee thinks that some “additional policy firming” may be necessary to achieve a monetary policy stance that is sufficiently restrictive to restore inflation to 2% over time.

“In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” it added.

In the future, the Committee’s evaluations will consider a wide variety of data, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international events.

Consumer inflation in the United States fell to 6.0 percent in February from 6.4 percent the previous month, although the figures remain much above the 2% objective. It was 6.5 percent in December and 7.1 percent the previous month.

The US Federal Reserve’s policy rate is presently in a target range of 4.75-5.0 percent, the highest in 15 years, while it was near zero in early 2022. Increasing interest rates often helps to temper the economy’s demand and hence manage inflation.

Notwithstanding recent inflationary pressures, the process of returning to 2% is still a long way off, and the road ahead is likely to be rocky, according to US Federal Reserve Chair Jerome Powell.

“Wall Street fell dramatically on Wednesday as the Federal Reserve raised interest rates by 25 basis points, as expected. Benchmark indexes fell in Japan, South Korea, and Australia fell earlier,” said Om Mehra, Equity Research Analyst, at Choice Broking.