How Indian markets will react if US Fed hikes interest rates

By: | Updated: September 17, 2015 4:34 PM

The US Fed decision will be a decisive factor for both equities and currency market movement in the coming days.

BSE SensexIndian equities closed around 1 per cent up on Wednesday on positive Asian cues, even as expectations that US Federal Reserve could raise key interest rate after the two-day policy meet (Sept 16-17) loomed. (Express Photo)

Indian domestic markets closed around 1 per cent up on Wednesday following positive Asian cues, even as expectations that US Federal Reserve could raise key interest rate after the two-day policy meet (Sept 16-17) loomed.

Although Indian stock markets will remain closed on Thursday on account of Ganesh Chaturthi, the US Fed decision will be a decisive factor for both equities and currency market movement in the coming days.

Between 2004 and 2006, the 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.

Fed policymakers will convene a two-day meeting on Wednesday and could decide to raise interest rates for the first time in close to a decade. “We feel it’s time to start gradually raising interest rates given that the US job market has more or less recovered,” Vijay Singhania, Founder-Director, Trade Smart Online said.

Gaurav Jain, director with Hem Securities also expressed the same view and said, “The markets will fall immediately. There will be global bearishness and India will be impacted by it.”

Few points to know in case US Fed goes for a rate hike

– If FIIS in debt markets rush to pull out following a possible Federal Resereve rate hike, it could end up putting pressure on the Indian rupee.

– A rate hike could potentially lead to massive amounts of pull-back of foreign funds from the emerging like India. US Dollar will strengthen against their currencies, gold and other assest classes, analysts said.

– High interest rates in the US are expected to wean away foreign portfolio investors (FPIs) from India. It is also expected to dent business margins as access to capital from the US will become expensive. Foreign funds have sold around $3 billion, mostly in Indian equities since August.

– On the rupee front, if a hike takes place then a free fall is not being ruled-out. Though the Reserve Bank of India (RBI) is expected to intervene and arrest the fall.

With inputs from Indian Express and IANS

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