Indian stocks close in red on continued US Fed's interest rate hike

New Delhi: Indian stocks settled lower on Thursday in line with weakness in the US markets, which declined sharply overnight as the US Federal Reserve went ahead with its further monetary policy tightening to bring down inflation to its target even as volatility in the banking system continued due to recent collapse of some banks.

Both Sensex and Nifty closed the day 0.5 per cent lower each; with majority of the Nifty sectoral indices trading in the red. During the day, the Sensex and Nifty for a while pared some of its early losses but could not hold on to it.

Monetary policy tightening in the form of interest rate hikes in the advanced economies is detrimental for India, and other developing countries, as investments tend to shift to those advanced countries where returns on investments are reasonable and stable.

"Although the Fed's decision to increase rates by 25 basis points was in line with expectations, concerns were raised by the U.S. Treasury Secretary's statement that blanket insurance for all deposits was not being considered," said Vinod Nair, Head of Research at Geojit Financial Services.

The US monetary policy committee, seeking to achieve maximum employment and inflation at the rate of 2 per cent over the longer run, hiked the key interest rate by 25 basis points to 4.75-5.0 per cent.

After the latest hike, the committee anticipates that some "additional policy firming" may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time.

Going ahead, the Committee's assessments will take into account a wide range of information, including readings on labour market conditions, inflation pressures and inflation expectations, and financial and international developments.

Consumer inflation in the US moderated in February to 6.0 per cent from 6.4 per cent the previous month, but the numbers are still way above the 2 per cent target. It was at 6.5 per cent in December, and 7.1 per cent the month before.

The US central bank's policy rate, which is now in a target range of 4.75-5.0 per cent, the highest in 15 years, and notably, it was near zero in the early part of 2022. Raising interest rates typically help in cooling demand in the economy and thus helps in managing inflation.

Despite inflation moderating in recent months, the process of getting it back down to 2 per cent is still a long way away and the path was likely to be bumpy, US Federal Reserve chair Jerome Powell cautioned.