US Federal Reserve Chair Jerome Powell stated late on Tuesday that there has been “a lack of further progress so far this year on returning to our inflation goal.” He indicated that a tight policy is likely to persist until inflation trends consistently move closer to 2%.

Powell’s comments mark a change in his stance following a third consecutive month in which a key inflation measure exceeded analyst predictions.

While pointing to the absence of further progress on inflation following the rapid decline observed at the end of last year, he suggested that the Fed might maintain rates at their current levels “for as long as necessary” if price pressures endure.

“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said Tuesday in a panel discussion alongside Bank of Canada Governor Tiff Macklem at the Wilson Center in Washington, as reported by Bloomberg News.

During March, the US retail inflation print jumped to 3.5% on an annual basis, against the expectation of 3.4%.

Also Read: US Fed Chair Jerome Powell signals delayed interest rate cuts amid high inflation

While the recent U.S. retail sales also jumped 0.7% month-over-month in March 2024, surpassing forecasts of 0.3%, showing that consumers continued to spend at a faster pace than anticipated despite borrowing costs at a 23-year high.

Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current 5.25% to 5.50% range.

Market experts suggest that Powell’s remarks could trigger additional selling pressure in equities, particularly in emerging markets like India. The delay in rate cuts has unsettled investors, especially after the US March inflation data was released last week, prompting a sharp sell-off in Indian equities.

Sharp sell-off

In addition to the delayed in the rate cuts, escalating tensions in the Middle East, a surge in US bond yields, the rupee hitting new lows against the US dollar, and selling pressure from foreign institutional investors (FIIs) have all added to the downward pressure on Indian stocks.

Amid this backdrop, both benchmark indices – Nifty 50 and Sensex – have experienced declines of 2.65% and 2.79%, respectively, in the last three sessions. Among the hardest hit in this market downturn were IT stocks, witnessing declines ranging from 2% to 6%.

Also Read: Infosys Q4 results preview: Revenue expected to fall on weak discretionary spending, margin to remain flat QoQ

Notably, the Nifty IT index emerged as the most affected sectoral index, recording a nearly 5% decline over the past three sessions, with expectations of prolonged rate hikes potentially reducing client spending. Further, the mixed results from IT giant Tata Consultancy Services have dampened investor sentiment towards IT stocks.

On the other hand, mid- and small-cap indices also witnessed a strong sell-off due to their rich valuation and expectation of moderation in earnings growth in Q4 FY24.

Potential reallocation of funds

On Tuesday, foreign institutional investors (FIIs) emerged as net sellers in the capital markets, offloading shares worth ₹4,468.09 crore, as per exchange data. Since April 12, FIIs have offloaded ₹15,763 crore on the rise in US bond yields.

According to market experts, the rise in US bond yields could prompt investors to reallocate their funds from riskier assets, potentially triggering more capital outflows from equities in favour of higher-yielding bonds.

Also Read: Will rising US bond yields cause more FPI outflows from emerging markets? here’s what experts say

Vinit Bolinjkar, Head of Research at Ventura Securities, said the rise in US bond yields could lead to foreign portfolio investment outflows from emerging markets like India. When US bond yields rise, investors can earn a higher return by investing in US bonds compared to emerging market bonds.”

“This can incentivize FPIs to pull their money out of emerging markets and invest it in the US. Rising US bond yields can also indicate a flight to safety by investors. This means investors may prefer the relative safety of US bonds over riskier emerging market assets during times of economic uncertainty,” he further added.

Hitting fresh lows

The Indian rupee plunged to a fresh low of 83.61 against the US dollar in the previous trading session, marking the second instance in four weeks. This decline was propelled by the strengthening of the US dollar index, which surged due to an increase in US Treasury yields.

Also Read: Rupee opens at a record low of 83.51 against the US dollar

The US dollar index, which gauges the dollar’s performance against six major currencies, surged to a five-month high of 106.50, exerting downward pressure on the currencies of emerging markets.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.