Impact of US Fed Rate hike In India

The US Fed Reserve’s much awaited open market commitee meeting (FOMC) to be held on 16th December to increase its benchmark interest rate by 25 basis points is perhaps the most trending global NEWS. Apparently, this would be the first such interest rate hike by US Fed since 2006. The Key Question remains, whether the much anticipated 25 bps interest rate hike happen this time round, and if at all, would it be a good or a bad news for the Indian stock market?

 

Would the Fed Increase Interest Rate?

Typically, as Interest rates are increased, consumers tend to have less money to spend. With less spending, the economy tends to slow down and inflation decreases too. Going by this rationale, it would be a cause of worry for US as its inflation rate is already below 1%, well below Fed’s target of 2%, and increasing the Fed Interest rate too soon, may push the US economy into recession. However, the good news for US is that it’s Un-employment rate has fallen by 5%, which is close to full employment. Seeing the low inflation rate and employment rate, it seems that the US Fed may not increase the interest rate significantly. Hence, dampening the interest ‘Lift-Off’.

Ken Peng, a strategist at Citigroup in HongKong says, If Fed officials “don’t do it this time, they’ll look stupid. The things that are causing the market to behave this way aren’t going to be resolved if they hold-off another month or two”.

 

Impact on Indian Stock Market?

In times of lower US Interest rates and favourable global markets, Foreign Portfolio Investors flock to emerging countries, including India, for better returns. However, as the US Fed Interest rates are increased, there are high chances of Foreign Portfolio Investors (FPIs) pulling money from the Emerging markets leaving emerging stock markets vulnerable to volatility. Even historically, we have seen Capital Outflows on expectations of US interest rate already making large corrections in the stock markets. This time around though, Janet Yellen has been preparing financial markets for a interest rate liftoff, hence the 25bps hike has been factored in the global equity markets, any deviation from that may be caused in for volatility.

Also, many Emerging Market currencies have fallen to their record lows against the US Dollar, including the rupee which dragged to below 67-mark against the dollar.

 

What sectors to watch out?

Owing to the uncertainty over an impending Fed Rate hike, dragging the Rupee to below 67-mark against the US dollar, it could mean positive and negative news on many counters.

Everything that is dominated by dollar would become dearer.

The bullion market remains bearing, triggering gold prices to fall down in the international prices. Domestically, gold prices will fall to below Rs 23,500/- too. Fuel imports would become costlier, which could trigger some inflation in India. Similarly for foreign travels and foreign education loan repayments. Again, as most of the medical equipment in the clinics and hospitals are imported, Medical inflation can increase. Indian software companies may gain on depreciating rupee.

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Surbhil is a technologist at heart and aims to enhance the user experience in his customer engagements. He enjoys making financial world simpler and easier to understand through his blogs on Markets, Economy and Tech. He is an IIM L alumni.

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