NEW DELHI: India’s equity market fell sharply again on Tuesday as investors pressed the caution button ahead of the important US Federal Reserve policy meeting outcome due on Wednesday. After touching an all-time high of 86,159 on December 1, the BSE Sensex has plummeted to 84,666.28 on Tuesday’s close. In the last two sessions alone, the 30-share index has crashed over 1,000 points. The NSE Nifty 50 also fell 121 points or 0.5% to end the session at 25,839.65.
While experts anticipate the Fed to cut rates by 25 bps, the growing chances of a hawkish tone regarding future rate cuts are weighing on equity investors worldwide. Market experts believe that the final reaction of equity investors will depend not only on the rate cut but also on the Fed’s forward guidance. If the tone remains cautious or signals volatility ahead, India’s equity market may respond with short-term caution.
The effect of the Fed meeting outcome is already being felt in the bond market as the US 10-year treasury yield climbed to a two-week high of 4.18%, while Japanese government bonds hovered near a 17-year high on Tuesday. The rising yield is a big negative for riskier assets such as equities.
Ross Maxwell, Global Strategy Operations Lead, VT Markets said that the outcome of this month’s Fed meeting is likely to significantly influence the Indian stock market because global investors closely track US monetary policy to determine risk sentiment and base their future decisions. At a time when the Fed is divided on how to proceed, it is likely to bring volatility to the global markets.
“IF the FED decides to cut interest-rates or adopts a dovish stance, it generally boosts global risk appetite, encouraging foreign institutional investors (FIIs) to increase allocations to emerging markets like India. However, if the FED hints at a prolonged period of tight monetary policy, global yields tend to rise, making US assets more attractive relative to emerging-market investments. This can trigger FII outflows from Indian equities, weaken the rupee, and put pressure on sectors dependent on foreign capital,” added Maxwell.
Investor sentiment has also taken a hit in recent sessions due to rising uncertainty around a potential India-US trade agreement. This has contributed to the weakening of the rupee which in turn is a major reason for FII outflow. US President Donald Trump’s recent signal of fresh import tariffs on agricultural imports, including on Indian basmati rice, has further dampened sentiments.
"Despite robust domestic growth figures and the RBI’s recent rate cut, short-term sentiment remains overshadowed by global monetary policy concerns, persistent FII outflows, and currency depreciation. Volatility was further amplified by a surge in Japanese bond yields to multi-year highs, sparking fears of a potential unwinding of the yen carry trade,” said Vinod Nair, Head of Research, Geojit Investments.
On Tuesday, Realty stocks led the decline, tumbling nearly 3.51%, followed by PSU Banks, which dropped 3.09%. Midcap and Smallcap indices also declined. Not a single sector managed to close in the green, underscoring the extent of the market-wide sell-off.