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Business News/ Market / Stock-market-news/  Sensex, Nifty unlikely to be affected by Janet Yellen statement
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Sensex, Nifty unlikely to be affected by Janet Yellen statement

Impact of US Federal Reserve chair Janet Yellen's rate hike hints expected to be temporary as experts see only one happening this year

Yellen said the case for a rate hike has strengthened in recent months in light of the continued solid performance of the labour market, and outlook for economic activity and inflation. Photo: AFPPremium
Yellen said the case for a rate hike has strengthened in recent months in light of the continued solid performance of the labour market, and outlook for economic activity and inflation. Photo: AFP

Mumbai: Stocks in India and emerging markets in Asia may slip when trading opens on Monday, responding to Federal Reserve Chair Janet Yellen’s comment that the case for a US interest rate hike had strengthened, but the impact is expected to be temporary as many market participants do not expect more than one hike later this year.

Moreover, improving macro economic parameters in India, the fastest growing major economy in the world, makes it better-placed among the emerging market equity markets to bear the jolt. 

Yellen, who was speaking on Friday at an international gathering of central bankers and academics in Jackson Hole, Wyoming, did not say when the US central bank would raise borrowing costs, and investors remained sceptical that such a move was imminent. 

“In light of the continued solid performance of the labour market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said, adding the Fed still thinks future rate increases should be “gradual." 

Her statements could warrant an immediate reaction in some riskier assets, especially if the rate hike happens in September. 

“For EM assets, a September hike would be bad news, as this is not priced by markets yet. A December hike has been partly priced, with a probability of 55%. So, there is not much room for a negative surprise anymore," said Maarten-Jan Bakkum, senior strategist (emerging markets), NN Investment Partners (NN IP) based in Netherlands. 

In an e-mail, Bakkum pointed to the market consensus that the Fed will remain very gradual in their rate moves in the coming years. 

“We do not see much risk that the Fed will have to change their gradual approach. For that, growth is not strong enough and inflation not high enough," Bakkum said. 

India may be less sensitive to the Fed speech, say some, given the strong expectations of improving economic growth, in the world’s fastest growing major economy. 

In the year to date, Sensex has risen 6.37% to 27,782.25 points, with foreign institutional investors pumping in a net of $5.78 billion in Indian equities. In the same period, MSCI EM index and MSCI DM index have added 13.09% and 3.88%, respectively.

Also, for the year to date, Brazil, Russia and Indonesian stock markets were the best performers among major emerging markets, with their key indices logging gains of 34.85%, 28.36% and 18.42% respectively.

“India, in a GEM (global emerging markets) context, is one of the less sensitive markets to Fed rate expectations. So, if EM overall is not too much affected by the Yellen speech, India is even less (affected)," added Bakkum. 

Since 2007, Indian equities have been the recipient of highest foreign fund inflows, compared to their peers in Asia ex-Japan, as investors placed bets on a domestic demand driven economy. 

Economic growth in Asia’s third-largest economy accelerated to 7.9% in the March quarter, making it the fastest growing major economy in the world, making it relatively stronger, to the hiccups in the emerging market space. 

Mihir Vora, director and chief investment officer, Max Life Insurance, pointed out that Yellen’s statements reiterated the Fed’s belief that the US economy is on its way to stable growth, low unemployment and moving closer to the inflation target of 2%.

ALSO READ | Janet Yellen’s Jackson Hole speech raises odds of a rate hike in December

“This increases the probability of a rate hike in the next few months. However, a lack of a hawkish bias in the commentary and the possibility of increasing the range of assets the Fed may purchase was taken positively by the markets," said Vora. 

“We see limited reaction to global markets as the markets were positioned lightly in anticipation of this event," added Vora. 

Some do not expect a hike in September.

“The Yellen speech has not changed our base-case scenario of the next interest rate hike of 25 bps by December 2016. Her comments imply that a September hike is possible, but the probability has not increased meaningfully. This is why we stick to our December view," said Bakkum of NN IP. One basis point is one-hundredth of a percentage point. 

The Fed has three more policy meetings this year: in September, November and December. 

Two hikes do not look very likely as of now; others too expect only one hike going ahead. 

“I think Fed has some confidence in their economy now, and either a September or a December is inevitable. Last time when the Fed hiked rates, it didn’t augur well for the emerging markets. We need to see how things pan out now," said Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd. 

“That said, eventually, markets have this amazing ability of finding a silver lining of optimism and they try and find one whenever," added Sanghavi. 

Reuters contributed to this story.

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Published: 28 Aug 2016, 11:58 PM IST
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