Focus Shifts: Fed up, now over to domestic factors

A day after the US Fed raised rates, the Indian equities and currency markets responded well, allaying investor fears of a huge fund outflow.

Written by Sandeep Singh | Published: December 18, 2015 1:02 am
US Federal Reserve, Federal reserve rate, interest rate, US Fed interest rate, US Federal Open Market, FOMC, economy The crucial US Fed call is over for now and a better prospect of US economy will only have a positive spill-over effect on the world and will provide support to overall growth.

In line with the trend across the Asian and European markets, the Indian stock markets opened on a strong footing and even the rupee gained ground against the dollar on Thursday after the US Federal Open Market Committee (FOMC) announced a 25 basis point hike in the interest rates. While the Federal Reserve stated that it expects a 100 basis point hike in rates in the next year and it has a bearing on the fund flow into emerging markets, the markets gained confidence from the fact that the Fed underscored a gradual pace of hike going forward and also outlined that the macroeconomic data in the US was showing signs of revival.

If the stock indices across emerging markets along with their currencies came under stress over the last couple of months, despite the Federal Reserve’s decision to defer the rate hike in its September meeting, Thursday’s upward movement at the stock markets across the world came as a reassurance to the investors and allayed fears of any sharp volatility in the market, following the FOMC decision.

While the markets were nervous ahead of the Fed’s decision and were concerned over a possible fund outflow from emerging markets, and a consequent fall in equity markets and depreciation in rupee, that was not the case on Thursday. The Indian equities witnessed a net FII inflow of Rs 638 crore on Thursday— the highest intra-day inflow in over a month’s time. Even the rupee witnessed a sharp rebound as investors’ confidence got restored.

The crucial US Fed call is over for now and a better prospect of US economy will only have a positive spill-over effect on the world and will provide support to overall growth. But market experts say that the focus will now shift back on domestic fundamentals, reforms implemented by the government and the earnings growth of India Inc.

“While other major economies continue to battle recessionary trends, the US economy’s strength may have positive spillovers for its trading partners. The stabilisation of external market conditions indeed provide opportune time for domestic policymakers to revive the issues plaguing the corporate sector,” said a report by India Ratings.

Some say that, this throws up a good opportunity for investors to enter into the market at lower levels and they should look to buy strong counters. It is not just the equities that are expected to do well for investors but even the debt funds are likely to generate higher returns.

‘Equities to regain their recent losses’

Stock markets in India reacted positively to the observations of the Federal Reserve and jumped 309 points or 1.2 per cent to close at 25,803 on Thursday. While equity markets across Asia jumped, there is a view that India is better positioned than many of its peers for a number of reasons. While on one hand India has seen a significant improvement in its external balances that now stand at around $353 billion, it has also found success in narrowing down its current account deficit. Also, while there has been a sharp correction in commodity prices and export-led growth, India is less dependent than several of its peers on commodity exports. Moreover, it has not been negatively affected by the fall in commodity prices.

Pankaj Pandey, head of research at is of the view that structurally the market is relieved now and while there was an outflow of fund ahead of the Fed meeting, some reversal may take place. “There will be some reversal of funds and the market may recoup some of its losses. However, in order to rise on a sustained basis, the earnings need to rise and for that the commodity prices will have to stabilise. I think this quarter’s earnings will be similar to the last quarter,” said Pandey.

There are others who feel that the markets will now recover some of their lost ground. “Most stock indices in the world may recoup part of December’15 losses. Nifty lows of 7500 to 7550 have been an area of strong support. Until the Index continues to hold these levels, expect the markets to gradually move towards 7950 to 8000 range,” said Sahil Kapoor, chief market strategist, Edelweiss Financial Services.

Rupee may hold its ground

The Fed’s decision brought some relief for the emerging market currencies, including that of India. On Thursday, the rupee gained 31 paise of 0.46 per cent to close at 66.42 against the greenback. The movement comes as a relief because the rupee had witnessed some pressure over the last couple of weeks and even breached the 67-mark.

However, over the last 10 weeks, rupee has been one of the most stable emerging market currencies and has lost only 1.3 per cent against its US counterpart. While Mexican Peso and Phillipine Peso did better, Chinese Yuan Renminbi lost 1.6 per cent against the dollar and the Brazilian Real lost 3.2 per cent. Even the Euro slid 2.2 per cent against the dollar in the same period.

Rupee remained stable even though the foreign institutional investors stood net sellers over the last two months. While they sold Indian equities and debt aggregating to Rs 10,826 crore in November, they sold an aggregate of Rs 6,836 crore till December 15.

A report released by India Ratings also supported the claim that emerging market currencies, including that of India will recover from their lows. “A dovish rate hike by Fed is likely to be positive for the EMFX space as questions persist not only over the timing of further rate hikes but also on the extent…. The rupee is likely to emerge as a gainer in near term. We believe that the rupee is likely to gain and consolidate in the 66.3-66.6/USD range. Its better placed macro fundamentals indicate that the rupee could continue outperforming both in absolute and relative terms.”

While the debt funds have underperformed over the last six to eight months, an arrest in the outflow of FII funds would provide some respite to the 10-year bond yields and they are expected to soften. The 10-year bond yield softened to 7.71 on Thursday from its Wednesday’s position of 7.737. A softening in the yield may just make debt returns attractive. It is important to note that despite a 125 basis point cut in interest rates by the RBI in the current calendar, the G-Sec yields have remained firm.

“The emerging markets are expected to do well as the Federal Reserve would maintain its accommodative stance and commodity prices are expected to be weak and this should favour countries like India. The softening in commodity prices would allow RBI to cut rates by 50 basis points in the next financial year,” said Murthy Nagarajan, head, fixed income, Quantum AMC. A cut in rates by RBI would make debt attractive.

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