The US Federal Reserve Chairman Jerome Powell announced Wednesday that the central bank will speed up the tapering of its asset purchase program, adding that three rate hikes are possible in 2022.

Financial markets across the world were waiting for the outcome of the US Federal Open Market Committee (FOMC) meeting given that the US is seeing its highest inflation rise in the past four decades. In its previous meet, the central bank had said it would taper bond-buying by $15 billion every month starting November 2021. That probably led the Indian market to apprehend worse, as it dipped around 1400 points in the past two months.

However, even as Powell talked to the press, Dow Jones, S&P 500 and Nasdaq soared higher. The relief is quite palpable among US investors as the much-apprehended rate hike is now stalled till the next FOMC meeting.

Markets have gotten used to running on the steroid of liquidity, fuelled by low interest rates. Analysts say correction is needed to bring some sense to the market.

Federal Reserve’s impact on the Indian markets

The correction in the Indian markets has already started and may continue on its own without being influenced by the Fed’s stance. Inflation and the liquidity drainage due to multiple expensive IPOs are already taking their toll on the Indian market.

As per Vijay L Bhambwani,head of research, Behavioural Technical Analysis, Equitymaster, 40% of Indian traders are under the age of 30 and 50% investors and traders are under the age of 40. This cohort of stock players have never witnessed a bear market. Fired with youthful optimism and devoid of experience, they believe that the stock-market moves just upwards and disregard the caution of seasoned experts as ‘age-induced-fearfulness’. Bhambwani believes that the current highs of the Indian indices are bound to sink, and the retail investors will get hit harder because of their over-optimism.

Sushil Kedia, founder, Kedianomics, says that the positioning of the yield curve of the US Bond market indicates that the US perceives its inflation to be transitory, which would fade away in the next six months. However, the Indian market has already been a super-achiever, he says, touching a peak of 18604, so the correction was going to happen anyway, without being affected by the Fed's decisions. Kedia adds that after the FOMC meet, Indian equities will witness a Santa rally, which may take it beyond 18000.

Markets caught between inflation and probable liquidity curbs

The Consumer Price Index (CPI) in the USA is 6.8%, the highest in forty years. In Germany, one of the economies that is most sensitive to inflation, the CPI is 5.2%, the highest in thirty years. For UK too, inflation at 5% is the highest in ten years. These figures indicate that inflation is rising across the world. This situation was expected as the financial world has been functioning on the back of declining bond yields for the past four decades.

The interest rates of Central Banks across the globe are at their nadir. The artificial suppression of interest rates, too low for too long, comes at a high price. "Rising inflation globally will create a path for rate hikes sooner than anticipated, which is increasing volatility in the market," says Bhambwani. "The Bank of England may hike rates soon, and this could propel other central banks like the ECB and FED to raise rates."

Indian equity market is showing signs of nervousness on the back of rising inflation. Nifty, which marked a high of 18604 on October 19, has corrected around 1400 points since then.

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