Fed Rate Hike in 2016 and Indian Markets

 

 

 





The US Fed policy meet on December 15-16 is expected to result in the first rate hike in almost a decade, here is a lowdown on the likely impact on Indian markets

1. How does the hike impact carry trade?

Investors would evaluate their po sitions as the US prepares for a rate hike.

Carry trades may get liq uidated, as investors will dispose-off risky assets and deleverage their positions. This may set off a selling spree in emerging market assets.

2. How will it impact Indian companies?

As global dollar liquidity will di minish, corpo rates with external com mercial borrowings are likely to face pressures for repayment. Such compa nies may also face the wrath of the market.

3. How will bond markets fare?

The interest rate hike will make US bonds even more attractive, as foreign investors will pull out of emerging markets toward safe haven US bonds.

Though there is a consid erable difference in inter est rates between US and India, the RBI has been lowering interest rates of late and is likely to reduce further, and this has nar rowed the difference.

4. What is the risk of rupee depreciation?

The rupee is already trading at `67.13 to a dollar, and may depreci ate further. Analysts expect the RBI to intervene to rescue the rupee. This is also likely to put pressure on the current account deficit.

5. What would be the impact on domestic inflation?

India imports about 80% of its crude oil requirement, and a de preciating rupee would increase fuel prices, which may add marginal pressure on inflation.

6. How will interest rates move?

The Reserve Bank of India (RBI) going forward may become reluc tant to reduce interest rates to counter inflation and stabilise the rupee against the US dollar.

7. How will the stock market take in this change?

An increase in interest rates in the US may force global funds to withdraw from emerging markets including India, which may cause the stock market to decline. They have already pulled out `12,500 crore from equity markets since November 1. The foreign institutional investors will invest in US market since interest rate hike will be an indication that US economy is improving and stable, further FIIs will fear that Indian rupee depreciation will wipe out their profits. However, Indian market may not react sharply because the Indian economy has been on recovery path and the GDP is growing in around 7.5%.

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