Indian stock markets have been behaving with caution ever since the speculation started trickling in on the Fed rate hike. (Photo: PTI)
All eyes are on the US Federal Reserve meeting that began on Tuesday with expectations rife that the central bank may go for a 25 basis points rate hike in a decade on Wednesday.
The Fed has kept its benchmark short-term rate near zero since setting it there in 2008 to help save the financial system in the depths of the financial crisis. The US Fed is ready to begin lifting rates toward normal levels with the job market all but fully healthy.
Indian stock markets have been behaving with caution ever since the speculation started trickling in on the Fed rate hike. According to the Bank of America-Merrill Lynch, “The BSE Sensex has been struggling in view of the uncertainties surrounding Grexit-II and the first Fed hike as valuations are on the higher side. We expect the Fed to raise rates by 25 basis points on December 16. In response, the RBI should sell foreign exchange to contain rupee volatility, if any.”
The benchmark index BSE Sensex fell 3.43 per cent since the outcome of the US Fed on September 17 where it maintained status quo but kept a space open for a gradual hike in interest rates.
Anticipating the US Federal Reserve may go for a rate hike, Reserve Bank of India (RBI) governor Raghuram Rajan last week had said that the central bank was ‘prepared’ for any change in global financial flows and market volatility.
“We don’t have any independent estimate, but looking at the market, there is a 70-75 per cent probability of the Fed raising rates. I think the Fed has prepared us carefully. So, it is likely that at this point they will go ahead, at least that is our betting,” Rajan said.
On asking about how the stock market will react if US Fed goes for a rate hike, an independent market expert Ambareesh Baliga said, “Stock markets could infact move up after an initial knee jerk reaction.”
However, Moody’s Investors Service cautioned investors and said the likely interest rate hike by the US Federal Reserve this week could pose risks to some emerging markets. Downside risks will remain for some emerging markets depending on the degree of exposure to rising US interest rates. The report did not specify rate hike impact on India.
G Chokkalingam, founder and managing director, Equinomics Research said, “Rate hike will certainly be considered as positive for domestic equity markets as the same would reduce fear on global defaltion. The industrial economy has also bottomed out which is reflected in terms of better IIP and robust fuel consumption and also indirect tax revenues. Hence, one can hope for market recovery post Fed rate hike.”
Earlier, between 2004 and 2006, the US Fed raised interest rates 17 times from — 1 per cent to in June 2004 to 5.25 in June 2006. This coincided with a period of high growth in Indian economy alongwith relatively low interest rate regime.
The rate hike by US Fed that time resulted in a sharp outflow from Indian debt markets. Foreign Institutional investors (FIIs) pulled out significantly from the Indian debt market and their cumulative holding went down from $1.77 billion in December 2004 to $550 million by June 2006. On the contrary, Indian equities, chasing high growth in the economy, witnessed a strong inflow — FII pumped in a record Rs 1,22,687 crore between 2004 and 2006. But this was the time when asset classes were doing well and there were few uncertainties.
Nikhil Kamath, director, trading & risk, Zerodha said, “a marginal 25 bps rate hike in overnight Federal funds is quite imminent and in all likelihood the decision to do so could be taken in the ongoing review meet. Markets across asset classes – equities in emerging markets, international currencies, and LIBOR markets have factored in this hike to a large extent. Hence given a rate hike, I do not foresee a big sell off in the Indian markets.”
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