Markets tumble as Federal Reserve retains hawkish tone; Sensex drops 1.4%

The Indian markets fell along with global peers on Thursday after the US Federal Reserve said interest rates would go “higher for longer”, dashing hopes that the central bank could take a dovish turn, following the softer inflation data of November.

The Sensex dropped 879 points, or 1.4 per cent, to end the session at 61,799, posting the biggest daily decline in about two months. The Nifty50 index, on the other hand, fell 245 points, or 1.3 per cent, to settle at 18,415. Index heavyweights like HDFC Bank and Infosys weighed on the market. The Nifty IT Index slipped 2.1 per cent, given its high exposure to the US markets.

Foreign portfolio investors (FPIs) sold shares worth Rs 711 crore, while their domestic counterparts provided buying support to the tune of Rs 261 crore. The US and European markets were trading in deep red, with rate hikes by the European Central Bank and the Bank of England adding to investor woes.

Wall Street’s main stock indices were down more than 2 per cent in early trade.

The US Fed raised its benchmark rate by 50 basis points on Wednesday, slowing down from four back-to-back 75-bp hikes. Fed Chair Jerome Powell, however, said the size of the next rate hike would be data-dependent, and refuted rumours of the central bank reversing its hikes next year. “I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2 per cent in a sustained way,” he said.

The Fed is now expected to raise rates to as high as 5.1 per cent, higher than the market projection of 4.6 per cent.

Analysts said the Fed’s language was hawkish and contrary to expectations. Equities had rallied last month, hoping the US central bank would soon pause hikes after a statement by Powell hinted at a policy shift.

“The market was hoping for a less hawkish tone, which was missing. If we go back a year ago, the Fed chair was saying inflation was transitory but the market was saying it is not. Now the Fed chair is saying he will keep rates higher for longer, but the market has a different view,” said Andrew Holland, CEO, Avendus Capital Alternate Strategies.

“This debate is going to rage a little bit more in the third quarter and will add to the volatility. If the market is right and the Fed continues with its policy then the mild recession people may think will be harsher and deeper,” he said.

Jack McIntyre, a money manager at Brandywine Global Investment Management, said in a note that the Fed was more hawkish than the markets had expected. “They seemingly still want financial markets to tighten further, which essentially means they want lower equity prices.”

Barring two, all the Sensex constituents ended with losses. Infosys declined 2.6 per cent and contributed the most to the Sensex’s loss. HDFC Bank fell 1.8 per cent. The market breadth was weak with 2,227 stocks declining and 1,325 advancing.