FII selling in Indian markets could intensify after hotter than expected US inflation numbers

New Delhi, Feb 14 (IANS) A major catalyst driving the rally in global equity markets has been on the expectations of a rate cut by the Fed, says V.K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

The Fed had indicated possibly three rate cuts in 2024 and markets had discounted up to five rate cuts. This was on expectations that inflation in the US will continue to trend down.

This expectation has received a jolt from the US CPI inflation numbers rising year on year to 3.1 per cent against expectation of 2.9 per cent. This means that the Fed will certainly not cut rates in March and the number of rate cuts in 2024 also will be lower, he said.

The bond market has quickly responded with the US 10-year yield shooting up to 4.31 per cent. The consequence in the Indian market would be heavy selling by FIIs. Banking stocks, which form the largest chunk of FII holding, will be under pressure. The broader market, which is overvalued, will also be impacted by the negative sentiment, he said.

Deepak Jasani, Head of Retail Research, HDFC Securities said January’s hotter-than-expected US inflation report threw the financial market into a tailspin on Tuesday and upended investors’ expectations about how soon and by how much the Federal Reserve might start cutting interest rates.

US stocks tumbled, with the Dow Jones Industrial Average finishing down by 524.63 points. Treasury's sold off aggressively, pushing yields to their highest levels since December. And the ICE U.S. Dollar Index jumped 0.7 per cent to a three-month high.

For now, fed-funds-futures traders see a 75.8 per cent likelihood of at least a quarter-point rate cut by June, pushing out prior expectations for a move in May, according to the CME FedWatch Tool, he said.

BSE Sensex is trading at 71,169.05 points down by 386.14 points or 0.54 per cent. IT stocks are down with Infosys and Tech Mahindra down 2 per cent.

(Sanjeev Sharma can be reached at Sanjeev.s@ians.in)