FOMC meet throws up correlation in Indian and US markets in times of rate hikes

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Starting March 2022, the Federal Open Market Committee (FOMC) has raised the policy rates nine times in a row but, surprisingly, S&P 500 closed in the red on the same day only thrice. What’s even more surprising is that the Indian benchmark Nifty 50 went into losses six out of those nine times.

A Moneycontrol analysis of Fed meetings since 2021 tracking S&P 500 and Nifty 50’s move after rate decision throws up a 'correlation coefficient' of 0.4x. In simple words, it means both indices are positively related but not to a great degree.

Numbers aside, analysts believe the much-anticipated 25 basis point Fed hike this time will have minimal impact on the strength of Indian markets. "Knee-jerk reaction could be there but buying will come whenever we head lower," Gaurang Shah of Geojit Financial Services said.

"We were sub-17,000 on the Nifty three weeks back and now we are above 18,000. US markets, on the other hand, have traded in a tight range. So, correlation is not justified," he added.

Moreover, there are too many variables in play this time around. The United States is recovering from a banking crisis, while Indian banks have been reporting resilient loan growth and profit growth in the ongoing Q4 earnings season.

“I believe we have decoupled. We will be the best-performing markets in the next few years. Our reform processes are strong, we sailed through the global banking crisis, too," AK Prabhakar, head of research at IDBI Capital said.

Meanwhile, on the inflation front, India's consumer price index (CPI) has fallen below the Reserve Bank of India's 6 percent upper tolerance limit. Meanwhile, US CPI inflation is still way above Fed's target.

"As we approach the fag end of the Fed rate hike cycle, the impact on the Indian economy and markets will be lesser, more so, as the RBI has already taken a pause," said Siddharth Khemka of Motilal Oswal Financial Services.

All eyes on Jerome Powell

Will Powell hint at a pause for the next meeting? While equity markets have been jittery due to the US banking sector crisis, a pause in rate hikes is not baked into equity markets, according to JPMorgan's analysts.

Andrew Tyler and his team believe the “hike and pause” scenario is the most likely — and the S&P 500 could add 0.5 percent to 1 percent in its aftermath.

That being the case, Indian markets could see a positive trend, too. If not, analysts believe Indian markets are strong enough to hold their ground.

After all, John Bogle famously said, “We deceive ourselves when we believe that past stock market return patterns provide the bounds by which we can predict the future.”