US Fed talk on interest rates may keep a lid on FPI flows

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The US Federal Reserve’s interest rate googly may be a bit of a dampener for foreign portfolio flows into India in the near term.

The Fed chair on Wednesday kept rates steady, hinted at delaying cuts, while shooting down talk of pivoting back to interest rate hikes. The Federal Open Market Committee said there had been a lack of progress towards its 2 per cent inflation goal.

“The message that rates may be higher for longer does not bode well for equity markets. Aggressive buying by domestic investors has been supporting the market and taking it to fresh highs despite intermittent selling by FPIs. However, this may not be sustainable if the FPI selling gets more pronounced In India whether because of continuing higher interest rates in the US or heightened tensions around the Red Sea, Ukraine or the South China Sea,” said UR Bhat, Director, Alphaniti Fintech.

FPIs turn sellers

On Monday, FPIs sold shares worth ₹964 crore, provisional data show, even as markets ended flat. In April, FPIs pulled out over ₹8,600 crore from Indian equities. Domestic institutions purchased shares worth ₹44,186 crore in the secondary market during the month.

The Fed plans to slow the speed of its balance sheet drawdown, after talking of such a shift in the past few months — by cutting the size of Treasury holdings by $35 billion monthly when compared with the existing pace of $60 billion. This can improve the financial conditions and support risk assets, said experts.

“The Fed offered the market liquidity with a larger-than-expected slowdown in quantitative tightening while seeking more time to assess the path of disinflation and timing for initiating rate cuts. The upshot is that while any move at the next meeting is off the table, there is still a chance of a rate cut in July,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

On Thursday, oil prices experienced an uptick amid speculation that the US might initiate purchases for its petroleum reserve. This followed a drop to a seven-week low due to optimism surrounding an Israel-Gaza ceasefire.

“The current market rally is fundamentally supported by GDP growth and decent corporate earnings. The market has already discounted the electoral outcome. Investors may adopt a multi-asset investment strategy, going forward, with highest weightage given to equity,” said VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services.