US Fed hikes interest rate. What does it mean for Indian markets?
Higher interest rates in the US generally lead to outflow of foreign funds from emerging markets like India. Analysts, however, say near term implications of the Fed policy are less hawkish than what the markets had pencilled in.business Updated: Mar 22, 2018 13:34 IST
Lack of surprises in the Federal Open Market Committee (FOMC) meeting outcome did not drag Indian stock markets on Thursday despite an interest rate hike by the US central bank.
The US Federal Reserve officials, meeting for the first time under chairman Jerome Powell, raised the benchmark lending rate a quarter-point. Policy makers continued to project a total of three interest rate hikes this year.
In the forecasts, Fed officials projected a median federal funds rate of 2.9% by the end of 2019, implying three rate hikes next year, compared with two moves seen in the last round of forecasts in December.
Higher interest rates in the US generally lead to outflow of foreign funds from emerging markets considered to be riskier assets.
Analysts said that more than the interest rates hike in the US, trade war treats lurking over global markets may have a deeper impact on the way foreign investors allocate funds into emerging markets including India.
According to a Bloomberg report, US President Donald Trump is set to announce about $50 billion of tariffs against China over intellectual-property violations. It will be Trump’s first trade action directly aimed at China, which he has blamed for the hollowing out of the American manufacturing sector and the loss of US jobs.
Pankaj Pandey, research head at ICICI Securities, said that the bigger worry would be trade war which may derail or curtail the over-all global growth. “That would be a bigger challenge for global investors which will impact most of the markets including India. Otherwise, I don’t think Fed rates hike will hurt FII flows to India,” he said.
VK Sharma, head PCG and Capital Market Strategy at HDFC Securities, said that the near term implications of the Fed policy are less hawkish than what the markets had pencilled in. “History has shown that unless the real interest rates rise beyond 2.5% the markets can very well take these hikes into stride. So we are not worried by the three hikes in 2019,” Sharma added.
According to Pandey, the markets are likely to stay in a range now. “Treasury income for banks will take a knock while asset resolution may take some more time. As a result, banking firms which contributes 40% to the index will hit overall earnings growth. Corporate earnings will appear flattish which would mean the markets will remain range bound. Combined to it, political anxiety will keep markets in tight range,” he added.