Fed talk on rates, inflation may keep FIIs muted in India

The US central bank is expected to keep key interest rates intact, but FIIs will closely follow its comments on ever-rising inflation amid an increase in fresh covid cases and global supply chain issues. The last meeting, which hinted at taper talks, had sent markets worldwide into a tailspin as investors dumped equities and rushed to other asset classes such as bonds.

Interest rate hikes by the US Federal Reserve typically leads to a reversal of FII inflows from emerging markets to developed markets. FIIs have already sold Indian shares worth $934 million so far in July, after pumping in $2.25 billion in May and June. This is the first sell-off by FIIs in three months.

Foreign portfolio investors (FPIs) have also been in a sell mode in July, said V.K. Vijayakumar, chief investment strategist, Geojit Financial Services. “As FPI selling is getting absorbed without any serious price damage, they can be expected to continue selling around Nifty 15,900. Eager retail investors and DIIs flush with funds are ready buyers even at higher levels,” he said.

Meanwhile, domestic institutional investors (DIIs) remained bullish on Indian shares. They bought shares worth ₹11,738.87 crore in July. DIIs have been net buyers of shares worth ₹8,814.01 crore so far this year.

Fed chairman Jerome Powell had recently said that inflation pressures are largely transitory, which means an imminent policy shift is unlikely.

“However, there could be discussions surrounding the path of tapering. Nonetheless, there is a growing hawkishness creeping into the viewpoints expressed by other FOMC members given the strong economy and the fact that inflation is running at more than double its 2% target. Any hint or talk of a September tapering and improving global growth environment could push the US dollar index higher, in turn, hampering all other currencies,” said Heena Naik, research analyst, currency, Angel Broking Ltd.

On Tuesday, the BSE Sensex fell 273.51 points, or 0.52%, to 52,578.76. The Nifty slipped 78 points, or 0.49%, closing at 15,746.45. The India volatility index, or VIX, was up by more than 6%.

Markets are likely to remain volatile this week ahead of the monthly expiry and the two-day FOMC meet, said Siddhartha Khemka, head, retail research, Motilal Oswal Financial Services Ltd.

“Global cues continued to be weak as the regulatory overhaul by China continues to create havoc, while investors continue to monitor corporate earnings along with extreme weather and the spread of covid. The market was also cautious ahead of a Federal Reserve policy meeting,” he said.

The Fed’s tightening of interest rates may not spell all bad news for Asia, while stronger US growth may be a positive for the region, said Morgan Stanley. “We do not expect taper tantrum 2.0 and believe that Asia could benefit from stronger US growth without being hurt by rising US rates. The recent minutes show the Fed’s resolve to remain patient in determining when and how to kick off tapering. Hence, the rise in US real rates is unlikely to be as disorderly as in 2013. Asia’s improved macro stability in comparison to 2013 reduces risks of disruptive rate hikes,” it added.