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Business News/ Markets / Stock Markets/  Explained: How the US Fed rate hike will impact the Indian stock market

Explained: How the US Fed rate hike will impact the Indian stock market

The US Federal Reserve may keep interest rates on hold at its meeting on 14 June. While a pause in rate hikes is expected, a decision to lift rates could lead to a sharp selloff. On the other hand, a pause followed by a signal for rate cuts could lead to strong market gains.

Fed's move on interest rates strongly influences the foreign capital inflow in India. Photographer: Al Drago/Bloomberg (Bloomberg)Premium
Fed's move on interest rates strongly influences the foreign capital inflow in India. Photographer: Al Drago/Bloomberg (Bloomberg)

The US Federal Reserve is expected to skip hiking rates this time on Wednesday, June 14. Several Fed officials have indicated in the recent past that the US central bank may take a pause on rate hikes in June but that should not be deemed as the end of the rate hike cycle because inflation still remains beyond its target range.

The latest inflation data also showed that the Fed may have some space for taking a pause on rate hikes. The US consumer inflation cooled for the 11th straight month in May but it is still above the Fed's target of 2 per cent.

"US consumer price index rose 4 per cent in May, its smallest annual increase in more than two years, but stayed well above the Fed's 2 per cent target. In the 12 months through May, core CPI climbed 5.3 per cent, showing that underlying price pressures remained strong," reported Reuters.

The US Fed is the world's most powerful central bank and its decision on federal funds rate have a significant impact on emerging markets like India. While the market has broadly discounted a pause in rate hikes this time, an in-line Fed outcome will have little impact on the market. However, if the Fed surprises the market and decides to lift rates, the market may see a sharp selloff. On the other hand, if the Fed takes a pause and signals that it is preparing for rate cuts in the subsequent policy meetings, the market may see strong gains.

Fed's move on interest rates strongly influences the foreign capital inflow in India. When Fed raises rates, foreign investors pull money away from emerging markets as higher rates give a boost to the dollar which erodes the shine of riskier equities.

How will Fed rate decision impact India?

Eminent investor Basant Maheshwari expects the Fed to take a pause in June, followed by a 25 bps increase in rates in July. He feels there may be a cut in November and by the end of the next year, the Fed rate would be in the range of 3-3.5 per cent.

Deepak Jasani, Head of Retail Research at HDFC Securities said a pause by the US Fed at its meeting on June 14 will moderate the fears of the market participants about the interest rate trajectory as then the US Fed will likely pause one of the most aggressive rate cycles in the central bank's history which has been ongoing for 15 months. This may result in a relief rally in markets across the globe including India.

However, Jasani added that the possibility of a rate hike in the July meeting still remains high. Hence, the rally may be short-lived. The US Fed may not begin to cut rates before 2024 having regard to the strong labour markets and sticky inflation.

Arpit Jain, Joint MD, Arihant Capital Markets underscored that a pause by the US Federal Reserve (Fed) is unlikely to substantially impact the Indian market. The current stance of India's monetary policy has maintained a status quo in interest rates, indicating a steady approach. With the US Fed pausing, the existing interest rate differential between the two countries is expected to be maintained, providing stability for the Indian market.

Jain said that the decision of the US Fed to initiate interest rate cuts will largely depend on the inflation data observed within the US markets, as it plays a significant role in shaping their monetary policy decisions.

Tanvi Kanchan, Head - Corporate Strategy at Anand Rathi Shares and Stock Brokers believes there may be some knee-jerk reaction to the global events but the medium-term outlook of the Indian market is positive.

"India's macroeconomic fundamentals are in reasonable health and corporate fundamentals are improving especially in terms of corporate margins, most valuation multiples for the Indian equity market remain below the averages for the last five years and slightly above the longer period averages. Given all these factors, we think the medium-term to long-term outlook for the Indian equity markets is positive. However, we cannot completely rule out a knee-jerk reaction in the short term due to any adverse global macro indicators," said Kanchan.

"Fed Chair Jerome Powell and others have time and again stated their clear intent on maintaining the Fed targeted inflation rate at two per cent which is currently more than twice its levels. So, while indicators are coming positive for a rate hike halt in June, we cannot rule out a possibility of further hikes till the inflation and other key numbers are not in the targeted range as defined," Kanchan said.

Divam Sharma, Founder at Green Portfolio PMS underscored there is an 82 per cent probability of a pause while an 18 per cent probability of a 25 bps rate hike in this June meeting. Markets are also predicting that Fed could skip a hike this month and announce a hike in the July meeting.

"The markets are predicting a 25bps rate cut only by January 2024. A pause should give further thrust to Indian markets in the form of FPI flows. We have already seen the broader markets and indices doing well since the April pause of RBI," said Sharma.

Sonam Srivastava, Founder at Wright Research said a halt in rate hikes would indicate that the Fed is comfortable with the current rate levels, which subsequently makes Indian assets more attractive to investors due to their higher yield compared to US assets. This can drive up foreign investment in India, bolstering the rupee and positively affecting the stock market. Moreover, if the Fed starts to cut rates, it can lead to lower borrowing costs in India, spurring business investments and overall economic growth.

A lower rupee could make Indian exports more expensive and imports cheaper, potentially impacting India's trade balance and a weaker US dollar could lead to higher commodity prices, which could impact India, a significant importer of commodities like oil, Srivastava pointed out.

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Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 13 Jun 2023, 05:09 PM IST
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