We have seen that the actions of a single central bank can swiftly influence market sentiment, capital flows, and economic stability across multiple countries. Central banks wield immense power to influence the stock market, with their policy decisions acting as inflection points for financial markets.
The interplay between a Central Bank’s actions and the stock market’s response is complex and dynamic; even a minor policy adjustment can set off a chain reaction across various sectors, leading to substantial market movements and volatility.
The recent decision by the Bank of Japan (BoJ) to raise interest rates to 0.25% serves as a stark reminder of how central banks’ moves can send ripples across global markets. The Nikkei 225 Index dropped 20% within three trading days of the announcement. Although the index rebounded by over 10% following the BoJ’s clarification, investors expect clear and consistent policy communication initially to avoid unnecessary market volatility.
When central banks’ policy decisions deviate from the norm, the impact on financial markets is often immediate and substantial. For example, when the BoJ shocked the markets by introducing negative interest rates in January 2016, the Nikkei 225 index reacted with significant volatility, plunging more than 11% in the week following the announcement. The announcement was intended to stimulate the Japanese economy by encouraging borrowing and spending. However, the immediate reaction in the stock market was starkly negative. Unexpected policy shifts, even with the intention of economic stimulation, can lead to investor panic and a loss of confidence, at least in the short term.On the other hand, when the Covid-19 pandemic triggered uncertainty and panic in global markets, the U.S. Federal Reserve responded with a series of measured actions, including cutting interest rates in an emergency meeting to near-zero and launching massive asset purchase programs. The FED’s careful communication strategy helped to restore investor confidence, facilitating a quicker-than-expected recovery in the equity markets. Although it was a different matter that it was late to react and in denial mode for a long time and believed that inflation was transitory.
On the other hand, the Reserve Bank of India (RBI) did a commendable job and was ahead of the curve in foreseeing inflation and communicating expectations clearly in advance.
In the recently concluded policy meeting, RBI decided to keep the policy repo rate unchanged at 6.5% and maintained a cautious and measured approach. It is widely expected that the Fed will start cutting rates in September and there is pressure on central bankers to cut rates. However, RBI is bold enough and even communicated clearly that it will give local conditions prime importance and not be in a hurry to cut rates.
There are several reasons for our market remaining steady amidst a global surge of volatility. One reason amongst them is the RBI who has not only managed the economy well but also managed the expectations and communicated them very well.
The Nikkei 225 declined by 20% within three trading days of the BOJ’s rate hike, US markets also witnessed deep cuts but the Nifty 50 declined by only 3.6%. This itself is a testimony of the fabulous work RBI has done in managing expectations.
Technical Outlook:
Nifty closed the week at 24,367, reflecting a 1.42% decline from the previous week. The index traded within a range, peaking at 24,420 and bottoming at 23,894, revealing a slight negative bias. This subdued performance was mirrored by global markets which showed short-term weakness, affecting domestic market sentiment.
Nifty remains below its 20-day moving average (DMA), currently around 24,550, which serves as an immediate hurdle. The daily RSI stands at 50, near the average line. Nifty needs to fill the existing gaps, which act as important resistance. However, the primary trend remains intact as long as Nifty holds above the 23,900 level.
The India VIX, currently at 15.33, surged 7.09% over the week, indicating increased volatility that could impact bullish sentiment. Sectors such as Pharma, Healthcare, and FMCG may perform well in the short term.
