Sensex, Nifty slip nearly 1% after new Fed chair remarks on rate hikes

Mumbai: Indian benchmark indices slipped nearly 1% in the early trade, tracking losses in both US and Asian markets as new US Federal Reserve chair Jerome Powell’s testimony stoked fresh fears of inflation and rate hikes.

At 9:35am, the BSE Sensex was at 34,152.46, down 193.93 points, or 0.56%, while the Nifty was at 10,481, down 73.30 points, or 0.69%.

Markets across the globe were under selling pressure after the new US Fed Chair Powell indicated that the central bank could hike rates more than three times this year, which jittered investor sentiments. In his first testimony before the House Financial Services Committee, Powell acknowledged that stronger economic growth may prompt policy makers to rethink their plan for three hikes.

Powell is taking over the Fed at a time when the world’s largest economy may be shifting gear to faster growth and declining unemployment, though inflation remains below the central bank’s 2% goal.

If the economy overheats, “We’ll have to raise rates faster, and that raises the chances of a recession, and recessions tend to hit vulnerable populations the most,” he added. “We’re trying to balance the risk of getting inflation up to 2% with the risk of the economy overheating.”

The central bank had signalled three rate hikes in 2018 in its summary of economic projections in December.

Higher number of interest rate hikes in the US may spell trouble for emerging markets like India which stand to see exodus of foreign liquidity.

Deepak Jasani, head of retail research at HDFC Securities Ltd, said that likely increase in number of rate hikes by the Fed in 2018 may lead to selloff by foreign institutional investors (FIIs) across regions including India. “A large portion of the markets upmove was driven by FII money; which also excited local investors with a lag. Absence of foreign investors buying may lead to domestic investors’ halting their buying or taking profits creating a negative cycle,” he said.

Jasani added that if US 10-year yield goes above 3% and remains there for some time, that may lead to selloff by FIIs across the globe. “Also, FIIs have selectively selling Indian shares so far in February and are seen reducing their exposure among others to banks (including the PSU ones largely) as the turnaround in their fortunes looks delayed post the Punjab National Bank scam expose and rising interest rate trajectory,” he added.

So far this year, FIIs have bought $506.80 million worth Indian shares, while domestic institutional investors (DIIs) pumped in Rs16,615 crore in the markets.

Another reason he pointed out that weighing on investor sentiment is the proposed tax of long-term capital gains (LTCG) that will come into effect from 1 April.

In the budget 2018-19, finance minister Arun Jaitley re-introduced LTCG tax, which will apply on profits made from sale of shares on or after 1 April 2018, while acquisition cost for computing LTCG will be the higher of the actual purchase price or the maximum traded price on 31 January.livemint