Stock exchanges that were nervous ahead of Wednesday’s Federal Reserve meeting applauded the U.S. central bank’s statement reiterating that it maintain an “accommodating position” until inflation and employment targets are met.

Indications that rates could be raised towards the end of 2022, and that the reduction in the Fed’s bond purchase program would be gradual and extend until the middle of next year, reassured players. of the market.

The Bombay Stock Exchange Sensex on Thursday jumped 958 points (1.6%), closing at a new high of 59,885. The largest Nifty on the National Stock Exchange rose 1.57%, to close at 17,882 . Markets also reflected diminished concerns about possible default on debt by Chinese real estate giant Evergrande.

What did the Federal Reserve say?

Even as it described the risks to the economic outlook in line with developments in the coronavirus, the Federal Reserve, in its statement released on Wednesday, said it would continue to “maintain an accommodative monetary policy stance” until until it reaches inflation slightly above 2 percent.

The Federal Open Market Committee (FOMC), which sets US monetary policy, has decided to keep the target range for the federal funds rate between 0 and 1/4 percent. It “expects it to be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Employment Committee’s maximum assessments and inflation has reached 2 percent, and is on track to moderately exceed 2 percent for some time. “

FOMC statement, September 22

The Committee expects to maintain an accommodative monetary policy until these results (on inflation and employment) are achieved. The Committee has decided to keep the target range for the federal funds rate at 0 to 1/4 percent, and expects it to be appropriate to maintain that target range (for now) …

What did the Fed say about the liquidity injection?

The Fed had said earlier that it would moderate the pace of asset purchases; he said on Wednesday that if the economy continues to progress, a moderation in the pace of asset purchases “may soon be warranted.”

Markets expect the Fed to begin the phase-down process from November, which could lead to a slowdown in cash flow. The markets rose sharply due to excess liquidity in the world, which was funneled into the equity markets; a slowdown in the bond purchase program will reduce its availability and diversion to markets.

The Fed is currently buying Treasury securities for at least $ 80 billion and mortgage-backed securities for at least $ 40 billion per month.

What does the Fed’s decision mean?

Asset purchases could decline by $ 15 billion per month, and ending asset purchases by mid-2022 will strengthen the case for a rate hike in 2023. The updated summary of economic projections Now involves three 25 basis point rate hikes in 2023, and the Fed is split on delivering the first hike in 2022.

Inflation above 2% is strongly signaled for the entire forecast horizon which had been extended to 2024. “We expect the Federal Reserve to act on the accommodating side of the median of the new projection as the president Powell will most likely favor a rate hike in 2023. The more hawkish outcome of the FOMC meeting is seen as a sign of strength that the US economic recovery and economic recovery are on track. The more aggressive interest rate path shown is favorable to the US dollar in the near term, ”said David Kohl, chief economist at Julius Baer.

Analysts say the cut is likely to be calibrated and non-disruptive to financial markets, meaning foreign investors are unlikely to suddenly leave India. The RBI’s monetary policy and unwinding measures will likely be in line with the US tapering decision.

Why did the markets rise on Thursday?

It had more to do with the Fed’s statement about raising interest rates – markets have been comforted by continued accommodative monetary policy for now.

Market participants believe interest rate hikes are still a long way off, which is good for Indian stocks. Low interest rates in the United States will ensure continued flow of funds from Foreign Portfolio Investors (REITs) into Indian stocks, while existing investments will likely remain in place for now. REIT flows into Indian stocks amounted to Rs 2,083 crore in August; it rose sharply in September and stood at a net amount of Rs 12,921 crore on Thursday.

In its latest policy statement, the Fed decoupled tapering from rate hikes; On Wednesday, he laid down strict inflation and employment conditions for a rate hike. Many believe it may be some time before employment targets are met – so there is hope that a rate hike could be in 12 to 15 months.

“Comfort came from the Fed’s hint that the tapering will not be sudden when it begins in November and continues until June 2022, as well as the committee’s setting strict conditions for a hike. I think the rate hike will only start towards the end of the 2022 calendar, ”said Pankaj Pandey, head of research at ICICIdirect.com.

Improving national economic conditions, accelerating the pace of vaccination and diminishing concerns around Evergrande have also boosted markets.

Where are the markets going now?

Participants agree that domestic markets will be more dependent on local factors in the future. It is hoped that a faster vaccination will result in a softer third wave of Covid if it hits, and that the economy experiences a new reopening and faster growth driven by consumption.

The head of a large global financial services firm said consumption is expected to rise close to Diwali and credit growth will accelerate over the next two months. In the past two weeks, banks and housing finance companies have announced mortgage rate cuts in anticipation of increased demand in the housing sector. If the unwinding of the RBI’s liquidity comes in 2022-2023, the flow of funds to the markets is also likely to decline.

While markets are expected to remain strong, it’s important to note that high valuations will keep participants on edge, and any unfavorable news can lead to strong backlash.

“This bull market has been a nearly one-way street for almost 18 months now. More importantly, this is an almost global phenomenon, with China, Hong Kong and a few other countries being the only exceptions, ”said VK Vijayakumar, chief investment strategist at Geojit Financial Services.

Earlier this week, fears of an Evergrande default spooked markets around the world. As markets rallied over the next two sessions, retail investors should either invest through mutual funds or go for large, fundamentally strong companies. They should also not get carried away by the daily flow of information; long-term investors don’t need to fall asleep to intra-day or weekly market movements.

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