This factor, not Union Budget 2023, will sway market sentiment in short term

While there are huge expectations across industries and income groups over the Union Budget announcements, what may impact the domestic stock market more are policy actions by central banks globally this week. The US Federal Reserve will announce the outcome of its two-day policy review later today. European Central Bank (ECB) and Bank of England (BoE) will review their money policies on Thursday. 

In the case of the US Fed, there are expectations that the US central bank would reduce the pace of rate hike to 25 basis points on Wednesday at its first policy review for the year. There are hopes that the US Fed could also lower its hawkish tone and may signal an end to rate hike cycle soon. That, if happens, should revive the market mood, analysts said. ECB and BOE, on the other hand, are expected to hike interest rates by 50 basis points each.  

Meanwhile, the impact of Union Budget, if any, would be short-lived. "To a large extent, the Budget has become a non-event for equity markets with most indirect taxes being brought under the ambit of the universal Good and Services Tax (GST) and ongoing off-budget policy announcements," Nirmal Bang Institutional Equities noted.

Deepak Jasani, head of research at HDFC Securities said the market’s existing trend may not be much impacted by the Union Budget. He said the trend will be affected by other triggers including the US Fed meet outcome on Wednesday, global market trends, local corporate results and the RBI MPC meet outcome on February 8.

Data showed FPIs were net sellers of domestic equities to the tune of Rs 28,852 crore. Any softening in the Fed tone may increase demand for emerging market equities such as India.   

Foreign brokerage Nomura noted that the US FOMC is widely expected to raise rates by 25 bps, with investors looking for clues from the Fed on how long the current hiking cycle could last. It believes that the Fed Chair Powell is likely to reaffirm that a slower pace of rate hikes does not suggest a dovish pivot of monetary policy in an effort to avoid “an unwarranted easing” in financial markets. It expects Powell to maintain his expectation of a slightly above-5 per cent terminal rate and no rate cuts this year, sticking to the “higher for longer” message.

"Later in the week, the focus will be on the crucial US non-farm payrolls (NFP) data, for which Nomura economists expect job gains to remain healthy at 2,15,000 (above consensus). Unless there is a hawkish surprise from the Fed and/or labour data surprise on the downside (raising US recession concerns), market sentiment will likely remain buoyant for now," Nomura said

Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA said the Fed could bring some relief if one hears any softening in the hawkish tone alongside a 25 basis point rate hike. There's now a solid body of evidence that the rate hikes are having a big impact which could warrant ending the tightening cycle very soon, he said.

"This will be followed by the ECB and BoE on Thursday, both of which are expected to stay in the 50 basis point camp. The commentary will once again be crucial here though, especially with the latter given the weak forecasts for the economy this year, an updated version of which will be released by the BoE alongside the decision," he said.

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