Fed staff drops US recession forecasts, what it means for Indian markets?

According to the minutes of Fed meetings in November of last year, the staff introduced the idea that a recession could be "almost as likely" as their baseline projection of below-trend growth. However, by March of this year, following the upheaval in the banking sector triggered by the collapse of Silicon Valley Bank, the staff's outlook changed to predict a "mild recession" later in the year, which, too, has now been dropped.

This shift in the staff's outlook reflects a more optimistic view of the US economy and should bode well for global markets, including India.

Also Read: Fed staff drop US recession forecast, Jerome Powell says

The going away of fears of a recession in the US is most likely to lift sentiment for export-oriented sectors such as information technology and chemicals, improving their growth prospects.

Most IT companies reported a slowdown in deal wins in the first quarter and hinted towards an uncertain outlook on that front for the quarters to come. However, with signs that a recession may actually be averted in the US, the bounce back in terms of deals wins for the IT sector may be quicker than anticipated.

Rohit Srivastava, a veteran investor, trader, and founder of Indiacharts, said that the IT stocks may have found their bottom with the Nifty IT at 26,180 levels and may not crash to new lows.

IT the most favoured sector

Srivastava is bullish on IT stocks and believes they may start performing with the market.  Even if the sector’s performance lags on a relative basis, he expects specific stocks to match up with the market.

Also Read: US Fed hikes interest rates to highest level since 2001

Srivastava said that investors also need to consider how technology is doing around the world. “The tech sector is actually still the most favoured sector because you're seeing the performance in US tech stocks driving interest in the sector.” Moreover, the positive sentiment around artificial intelligence (AI) is also likely to aid the IT sector.

Bucking a recession would also translate into growth and an increase in manufacturing activity in the US, which will also support demand for chemicals that have gone through a period of slump in recent quarters due to a weak export environment.

Vinit Bolinjkar, head of research at Ventura Securities, said the chemicals sector is showing green shoots of recovery, as demand gradually comes back, and will continue to do so in the upcoming quarters. Most brokerages also predict a demand recovery to kick in from the second half of the current fiscal.

The expectations of improved economic activity in the US are also aligned with the slight upgrade made by Fed policymakers in their assessment. They now characterise recent economic activity as indicating a "moderate" rate of growth. This is a departure from their policy statements in September, where they referred to activity growth as "modest".

Another impact that the easing of recession concerns may have is on the US dollar index. Bolinjkar also believes that the dollar index will continue to weaken further going ahead and that will help support foreign inflows in emerging markets, especially India.

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