Short covering on Fed’s rate decision buoys Dalal Street; FIIs and DIIs stay away

MUMBAI: Dalal Street cheered the prospect of continued easy money flows from US fund managers after the Federal Reserve said it would keep interest rates at near-zero levels for “some considerable time”.

The Fed Reserve’s statement came as a relief to investors and traders, who covered their aggressive short positions built ahead of the event, driving the Sensex above 27,000 on Thursday, once again.

Shares of automobile and engineering companies led upsides while the disappointing commentary about the US economy triggered profit-booking in technology shares. But gains were led by short-covering in the derivatives segment rather than fresh purchases.

The deep-pocketed foreign institutional investors (FIIs) hardly reacted to the Federal Reserve statement, selling shares worth nearly Rs 10 crore. Their domestic counterparts bought stocks worth a measly Rs 85 crore.

“We expect the first Fed hike in June 2015 and the Fed funds rate to move to near 1% by end-2015,” said Jyotivardhan Jaipuria, MD & head of research, Bank of America Merrill Lynch.The rupee too closed higher on Thursday, reversing losses earlier in the day, even as the uncertainty surrounding the impact of the Scottish referendum loomed over the global currency market.

On Thursday, the rupee ended at 60.83 a dollar, nine paisa or 0.15% stronger than its previous close of 60.92. Currency market participants do not expect the rupee to fall sharply against the dollar even if Scotland eventually decides to separate from England. India was one of the top gainers among Asian markets on Thursday.

The BSE Sensex advanced 480.92 points, or 1.81%, to close at 27,112.21. The NSE Nifty surged 139.25 points, or 1.75%, to close at 8,114.75.Brokers said the rally was more on account of a hope among traders that FII inflows into the country’s stocks may continue uninterrupted till mid-2015. The market was expecting indications from the Fed that it would raise rates by early 2015, which had triggered a selloff in the past week or so.

“We were expecting some negative news from the US Fed, but the outcome was positive,” said Motilal Oswal, CMD of Motilal Oswal Financial Services. “The recent correction was a muchneeded one and we are now seeing renewal of buying momentum.
We expect FII participation to increase going forward,” he said. Investors in emerging markets including India are wary of interest rate increases in the US as it could choke portfolio flows into these markets. Higher rates would lead to the strengthening of the dollar, deterring FIIs from pumping money into these riskier markets.

In the currency markets on Friday, the rupee could react to the outcome of the Scotland referendum.

“Scotland referendum per se should not impact USD-INR except to the limited extent the broader US dollar derives its direction from this outcome,” said RK Gurumurthy, head treasurer at Lakshmi Vilas Bank. “Scotland is not a major trading partner for India.”“Assuming Scotland leaves the UK, the independent country will have to decide on a multitude of issues ranging from its currency, parity or peg of that currency, interest rate levels,” he said.

The rupee could move 25-50 paisa in a kneejerk reaction in response to a large move in the dollar against major currencies, post referendum, some dealers said. “We would expect USD-INR to move in line with broad USD move post the event with a slightly softer bias,” said Anindya Dasgupta, head treasurer and managing director at Barclays. “The interest in the India story seems largely intact amidst lower commodity prices and robust portfolio flows in both equity and debt.”