Fed turns dovish but hikes rate, again: Cues for Dalal Street investors

A 25 basis points rate hike by the US Federal Reserve was a given, and the stock market in India was hardly surprised. For the bulls, the key takeaway was a 'dovish' Fed that suggested a possible status quo on the policy rate in the next review on September 19-20. The bears would argue the US central bank kept its doors opened for future rate hikes and said it would be data-dependent. Analysts said the lack of aberration in the policy statement suggests the US FOMC is in a “When the Facts Change, I Change My Mind” mode. They, however, believe the US rate hike cycle is broadly behind us.

It seems like market knows what the Fed Chief Jerome Powell is not willing to tell is that the rates have peaked, Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities said.

"It is only a matter of time that the US inflation dips below the 2-per cent mark, so that the Fed can declare victory against the highest inflation in 40 years," Sheth said.

Wednesday's was the eleventh rate hike by the US Fed in last 12 policy meetings. The benchmark lending rate in the US at 5.25-5.5 per cent, in fact, hit the highest level since 2001.

Considering the massive rate hike cycle in place and inflation challenges reducing, more rate hikes are not needed at this juncture, said Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS.

Kulkarni said further rate hikes could be detrimental to economic growth prospects raising the chances of a hard landing.

No US recession ahead

Madhavi Arora Lead – Economist at Emkay Global said the only notable change to the post-meeting statement this time was an upgrade of the description of economic growth to “moderate” from “modest” in June and still added a bias toward “additional policy firming.” 

"While the statement had a hawkish bias, Chair Jerome Powell’s post-meeting press conference tilted a little toward the dovish side. While noting the FOMC is not committed to further action, he stated he saw encouraging signs on labour markets and inflation. Interestingly, he noted that the staff backed off its 2023 recession forecast later this year to a notable slowdown in growth," he said.  

India's case

Nomura India said the changing dynamics of food inflation mean the RBI will most likely raise its FY24 inflation forecast from 5.1 per cent to 5.3 per cent at its August 10 policy meeting.

"We expect a hawkish hold at this meeting. While inflation breaching 6 per cent in July (top end of the RBI’s 2-6 per cent target range) would be optically bad, the jump would be almost entirely due to vegetables, while underlying inflation is stable or moderating. However, we expect a hawkish hold at this meeting, as the MPC needs to guard against potential second-round effects," it said. 

Nomura India has pushed out the forecast timing of the RBI’s first cut to February 2024 against October 2023.

"With crude prices inching up again due to supply cuts and expected optimism in China's recovery, it will be important to track the inflation prints for July and August. Indication is that the interest rates will remain higher for longer. It will be interesting to see the stance that RBI takes in the policy meet in August. Inflation print in June came in higher than street estimates. Increasing vegetable prices due to erratic monsoon and soaring crude will add to inflationary pressures going forward,” said Srikanth Subramanian, CEO at Kotak Cherry. 

Vigilance towards inflation risks remains a key focus for the rate-setting committee, Radhika Gupta, MD & CEO at Edelweiss MF.