Fed rate hike will not affect India

Fed rate hike will not affect India

By SHAILENDRA TYAGI | New Delhi | 10 September, 2016
People take photos at the Wall Street Bull near the New York Stock Exchange (NYSE) on 25 August 2016 in New York City. Stocks fell on Friday after news that the US economy grew at the sluggish rate of 1.1%. Despite the slowing growth rate Fed Chair Janet
Some short-term volatility is expected, but not a bloodbath, as India’s economic fundamentals are strong.
The fundamentals of the Indian economy might be up for a real test if the Federal Reserve does raise the interest rates in US later this month. Many see a good probability of that (rate hike) happening which might shake up stock markets across Asia, though in varying degrees. They, however, do not expect much bloodbath happening in India largely due to its strong economic fundamentals which they admit are still to reflect in impressive GDP numbers. “In terms of probability, I see 70% chance of Fed actually raising interest rates later this month on the back of personal consumption data which in the past six to eight months has gained momentum,” says Abnish Kumar Sudhanshu, Director & Research Head, Amrapali Aadya Trading & Investments. Such an event might push American and Japanese funds (most active in Indian stock markets) to move out of the country. So some short-term volatility is indeed expected, but “the intactness of India’s growth story would provide a solid base for Indian equities to create new highs, not very far from now,” says Sudhanshu.

The expected event might impact the sentiments of FIIs who brings in money, “But it would have no significant impact on Indian stock markets,” says Nilesh Shetty, Fund Manager, Equity with Quantum AMC “In fact, it may turn out to be a non-event as far India is concerned.” The subdued earnings of Indian companies (which determine stock market returns) are likely to take a big jump forward. “Catalysts for that, like good monsoon and the government’s continued focus on structural reforms, are well in place,” adds Shetty. Since India essentially remains a consumption driven economy, good monsoon, benign interest rates together with pay commission hikes would provide enough triggers for consumption to pick up in a big way, thus improving the finances of companies.

Indian stock markets were in bullish mood for the better part of the week gone by largely due to foreign liquidity which lifted the Sensex — the benchmark index of Bombay Stock Exchange — to over 29,000 levels, a high gained by it back in April 2015. Many feel that the uninspiring US job data released recently might restrain the Central bank to hike interest rates which for the Indian equity market means an un-interrupted inflow of cheaper liquidity. Many economists believe that even after Fed’s hike, India’s attractiveness among foreign investors is likely to sustain due to India’s pro-reform march.

The Modi government’s initiatives in promoting financial inclusion, pushing GST to its logical conclusion, structural reforms being implemented in the fuel subsidies front, low (but sticky) inflation that opens the door for further interest rates decline, are  all pointing out towards the good prospects of India’s growth story. Such a view about India is being endorsed by many multi-lateral and credit ratings agencies by calling India a “bright spot”.

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