Mkt volatility may increase on policy moves: Experts

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The BSE Sensex rose for the second week but stocks were down 0.8% on Friday, in line with global equities, which tumbled after the US Federal Reserve unexpectedly lifted an emergency lending rate.

The Federal Reserve on Thursday raised the interest rate it charges banks for emergency loans but insisted that its first rate move since December 2008 would not raise borrowing costs for consumers or companies.

The Fed cast its decision to raise the discount rate to 0.75% from 0.5% as a response to improved financial market conditions that warrant less of a helping hand from the US central bank.

Energy major Reliance Industries, which has the highest weight on the main index, contributed the most to its losses and declined 1.3% to Rs 984.25.

On Friday, the 30-share BSE Index closed 0.83% or 136.21 points lower at 16,191.63, taking the week's gain to 0.2%. The 50-share NSE index declined 0.9% to 4,844.90.

"Clearly, our market today was hurt by the weakness in global markets, after Fed hiked the discount rate," said Rajen Shah, chief investment officer of Angel Broking.

Shah expects the main index to hover in the 15,500-16,500 range in the near term.

"At the Budget, the government will take care not to hurt investor sentiment as they are coming up with FPOs (follow-on public offers) themselves," Shah said.

India unveils its federal budget for the 2010/11 financial year (April-March) on February 26.

Global stocks were weak with Asian markets other than Japan dropping 1.6%, while the pan-European FTSEurofirst 300 index was down 0.5% by 1026 GMT.

However, with more global concerns that local ones, what is the outlook for emerging markets ahead especially India?

'Fed move no surprise'

"The Fed's move - while it has an immediate market impact - should not be seen as that much of a shock," said Gerard Lyons, Global Head of Strategy and Economics at Standard Chartered.

"The reality is that the Fed has, for the last couple of months, indicated two things. One is that they want to normalise market conditions and the second is it does not want to raise the Federal funds rates."

Lyons said the move should be seen as normalisation of market conditions than monetary policy tightening. "We do not expect the Fed funds rate to go up until the second half of next year."

The message highlighted by the Fed move is that the exit strategies the world over may not be easy to implement. "We are likely to see further steps - like the Fed move - maybe not next week but over the next few months," he said. "So we are likely to see increased volatility in markets for some time as markets digest not only the economic and inflation outlook but the policy outlook."

Chin Loo, Senior Currency Strategist at BNP Paribas, said, going forward, one may see a reduction in risk appetite due to fiscal problems in the Eurozone and a similar risk in other developing countries. "That and the monetary policy normalization would be headwinds weighing against return of risk appetite."

"Having said that, the fundamental picture in Asia is much better and investors are making distinction," Loo said. "So even if the markets have a knee-jerk sell-off on the back of a discount rate hike in the US, the longer-term fortunes for investment in Asia still look fairly bright."

- With inputs from agencies