Fed policy in line with expectation, but Indian shares may plunge if US bonds spike

"The level of 4.335% on 10-year treasury yields remains crucial for the bulls. The moment yields starts trending above this level we might see a deeper correction in Indian markets," said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.

The US Federal Reserve walked the expected lines to keep the policy rates unchanged.

Fed chair Jerome Powell's overall message on March 20 was dovish and continued to hint at a rate cut in June. He largely confirmed comfort on the macro variables, and said that it would be appropriate to scale back quantitative tightening “fairly soon".

Although the US 10-year bond yield has been on a decline over the past one month, analysts believe any rise could trigger a sharp correction in Indian equities.

The Fed dot plot—a graphical representation of FOMC members future interest rate projections—hinted  at three rate cuts this year. However, the dot plot now shows fewer expected interest rate cuts in 2025 and 2026 compared to the forecast from December 2023. Investors cheered the Fed commentary, pushing all the major Wall Street indices to fresh record highs.

Also Read | Nifty, Sensex echo global cheer as US Fed keeps rates steady, hints 3 cuts this year

According to Bloomberg, traders are confident that the Fed will start lowering the interest rates in June. Asian markets too surged, tracking the gains in the mother market.

DXY fell after the Fed policy and the US yield curve steepened, meaning the gap between short-term and long-term interest rates widened.

"A combination of these two is good for Indian equities, especially high-beta cyclicals. At this time, the biggest risk to the Indian market is rising oil prices which will ironically get support from a falling US dollar," veteran fund manager and co-founder of Pinetree Macro, Ritesh Jain told Moneycontrol.

Going forward, inflation and unemployment data from the US should be watched keenly, he said.

US markets took a positive view of the Fed chair’s hints of a June rate cut despite a strong jobs market. Yields on the 10-year US government bonds slipped, fuelling the rally in riskier assets like equities. Global equities and gold too moved higher.

"The level of 4.335 percent on 10-year treasury yields remains crucial for the bulls. The moment yields start trending above this level, we might see a deeper correction in Indian markets," said  Apurva Sheth, head of market perspectives and research at SAMCO Securities.

Also Read | Fed sees three rate cuts in 2024 but a more shallow easing path

His colleague Dhawal Ghanshyam Dhanani, international equity fund manager, found it interesting that the stocks rallied despite the drop in the the number of expected rate cuts in 2024 from 6 to 3.

“With BoJ scrapping radical interest rate regime, hiking interest rates in 17 years shows an independent approach undertaken by central banks across the globe after Covid,” he said, adding that global markets will to reset to these nuances at their own pace.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.