The US Federal Reserve, on Wednesday, hiked interest rates by 25 basis points, its third interest rate hike in the last seven months. (Image: Reuters)
Indian markets seemed unfazed by the US Federal Reserve interest rate hike as the broad markets are trading mostly higher or flat today. In the past, the effect of a Fed rate hike was a sharp fall in Indian equity indices, but this time, mirroring the trend in last one year, the market holding its own is a testimony to India’s growing economic strength in the emerging markets and absence of better investment destinations.
Data from the past one year shows that BSE Sensex did not move more than 1 percent on either side after the US Federal Reserve announced its interest rate policy. When the US central bank hiked rates in December 2016, Sensex tripped only 0.3 percent, while after the rate hike in March it actually rose by 0.7 percent.
Foreign portfolio investors may not drain away funds from India in a knee-jerk reaction to the Fed rate hike, as that would mean missing out on the enormous growth opportunities Indian markets offer. However, the US Fed rate hike could have some short-term impacts on the Indian economy and markets.
In the short-term, the third interest rate hike by the US Federal Reserve in the last seven months may cause a limited amount of foreign fund to outflow from India as the yields on US bond will improve. Another scenario of the increase in US bond yields could be that foreign portfolio investors may not pull out their money from Indian Debt and equity markets, but may limit their investments to some degree.
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The US Fed rate hike has a cascading effect on all emerging markets and therefore may lead to a depreciation in Indian Rupee. Any minor weakening of the Rupee may not witness any intervention by the Reserve Bank of India (RBI) as easing inflation and slowing growth continue to play on the minds of RBI board members.
The earnings of companies with foreign revenue or debt exposure will most likely be affected due to fluctuation in Indian Rupee. Earnings of Import oriented companies will be under pressure with a weaker Rupee, whereas export-oriented industries will benefit from favourable foreign exchange gains.
In the short run, the negative effects of FII outflows as a result of the US Fed’s rate hike will overshadow the positives of India’s strong macroeconomic picture, improving fundamentals and inflow of funds from DIIs, however, it is unlikely that the long-term investment story of India will get impacted due to this rate hike.