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Business News/ Markets / Stock Markets/  Should you be worried about further rate hikes in the US?
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Should you be worried about further rate hikes in the US?

The current stance of the US Federal Reserve is considered dovish, while the Reserve Bank of India continues with a withdrawal of accommodation stance. Rising geopolitical tensions and crude oil prices may cause inflation and affect monetary policy.

The 10-year bond yields have recently touched the 5 per cent mark—this was seen last in the calendar year 2007. (AP Photo/Seth Wenig) (AP)Premium
The 10-year bond yields have recently touched the 5 per cent mark—this was seen last in the calendar year 2007. (AP Photo/Seth Wenig) (AP)

At present, globally, the interest rate cycle is at an interesting point. The Federal Open Market Committee decided to leave Fed Funds Target Rates unchanged at 5.25 per cent to 5.5 per cent on November 1, 2023. 

Though some market participants expect one more rate hike of around 25 basis points, the probability of it seems low now compared to a month ago. 

After watching highly volatile bond yields for some time this is a great respite because high-interest rates to curb inflation, are also pulling down the expectations of economic growth and valuations of risky assets. 

In this context, it is interesting to see where the interest rates are headed and how would they impact investments. Let us understand the situation in greater detail.

A clear connection

Valuations of risky assets, especially equities, matter for investors and traders both because, in a bull market, an expansion in valuation multiple on many occasions rewards investors more than a growth in earnings of the underlying. 

Lower interest rates provide a convincing basis for investors to take risks in search of high returns and that ‘risk-on’ mode elevates valuations ultimately rewarding investors. 

No wonder, investors and traders are waiting for the interest rate cycle to turn. As a result, financial markets will be flush with liquidity. This in turn boosts economic activity. 

Also Read: India count in MSCI EM index now at 131

In this backdrop, it is interesting to see how monetary policy is aligned with the macroeconomic goals of respective economies. 

The current stance of the US Federal Reserve can be considered dovish despite the pressure it puts on inflation and economic activity. 

In India, however, the Reserve Bank of India has been continuing with the stance of ‘withdrawal of accommodation’ to ensure that inflation progressively aligns with the target of 4 per cent without hurting growth. 

Also Read: Mint Primer: The rupee, its fall, slight recovery and what the RBI did

A change of stance to neutral would indicate a possibility of accommodative monetary policy in future which allows room for cutting interest rates. 

But for the time being RBI is not in a hurry to change its stance to neutral. Worries emanating from the rising geo-political tensions can cause supply chain disruptions which will increase crude oil prices. 

Rising crude oil prices can cause imported inflation since India is a large importer of crude oil. This may further elevate inflation which is being dealt with by raising interest rates. 

Also, rising interest rates in the US have a bearing on the Indian monetary policy. 

If interest rates in the US go higher and interest rates in India do not rise then there is a possibility of flight of capital from India to the US and that may pressurise the Indian currency. 

Though RBI may take some time to cut interest rates, there are some opportunities for investors.

Also Read: Indian equities to receive net $1.5 billion inflow with latest MSCI index rejig: Nuvama

Opportunities

A sitting duck opportunity can be seen in the US treasuries. The 10-year bond yields have recently touched the 5 per cent mark—this was seen last in the calendar year 2007. 

Since the US Fed’s announcement, it has corrected to 4.55 per cent factoring in the changed market expectation that yields may go down earlier than expected. 

In India, recently two mutual fund schemes were launched to take advantage of falling yields in the US Treasuries. 

While savvy investors may invest in such US-focused debt funds, many would be comfortable investing only in India due to sheer familiarity with the markets. 

Indian bond yields too are attractive and an investor can look at short-duration bonds and debt funds to benefit from the same. 

A possible downward movement in bond yields may offer some capital gains over some time. 

Some savvy investors may want to also allocate money gradually to medium to long-duration bonds and debt funds investing in them. 

But these come with the risk of interim volatility if the yields spike. Such investors also find solace in the money flowing into Indian G-sec the next year due to inclusion in global indices. 

Large foreign flows into the Indian government securities can effectively trigger a fall in bond yields if other things remain the same. 

A bigger opportunity may come for equity investors but with volatility. As and when interest rates come down in the US, money will flow into emerging market equities including Indian stocks. 

Investors need to ensure that they are focusing on stocks of Indian companies with relatively low debt and sustainable growth to ride out a volatile phase till interest rates eventually turn favourable. 

Keep aside the volatility in the near term, investors must not be excessively worried about possible rate hikes by the US Fed. 

Shortly, fears of rate hikes may create some volatility in equity markets, which can offer the best opportunities to build portfolios for the next phase of a bull run.

Read all market-related news here

(The author is the CEO of Choice Equity Broking and a board member of its listed parent company Choice International Ltd)

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 16 Nov 2023, 10:12 AM IST
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