The Federal Reserve’s decision on Wednesday to defer the rate hike in US by at least three months ensued a relief rally in the markets worldwide. While there was apprehension in the markets ahead of the crucial decision that could have resulted into an outflow of capital from emerging markets including India, experts feel that forthcoming meetings of the Federal Open Market Committee (FOMC) on rate hike should not be a cause for concern for long-term investors. Market participants and even the RBI Governor feel that while it may result into short-term volatility, things would return to normalcy in some time as the domestic fundamentals remain intact. If that is the event risk, many feel that the only thing the market is worried about is growth in corporate earnings as a pick up in earnings would lead the next rally in Indian markets.
Concerns over outflow of funds
Even though the markets have discounted most of the impact of the interest rate hike in the US, market participants say that there may be some knee jerk reaction from some investors who may pull out funds from emerging economies and redeploy them in the US and that may put pressure on markets.
Experts feel that while one hike may not bring the interest differential between India and US down significantly, it may set the tone for more such hikes and that is a cause of concern. “The rate hike announcement will be a signal for subsequent rate hikes and a series of hikes in interest rates in the US over a period of time will raise the borrowing cost for carry trade (borrow from US and invest in India), and also reduce the risk-adjusted return in India,” said Abheek Barua, chief economist at HDFC Bank.
What may also go against India in terms of the fund outflow from the economy is the fact that Indian central bank has embarked towards a lower interest rate regime at a time when the US is looking to go for interest rate hikes. As a result of this while the borrowing cost in US will go up, the return from India will go down making it more attractive for global debt investors to invest in the United States.
The outflow of funds may put pressure on the rupee and the equity markets too. Experts also say that this may make US bonds more attractive. The US is in any case considered a safe haven, and investors looking for stable low-risk returns will be more attracted towards United States bonds.
But you should not be worried
Dollar is the reserve currency of the world and hike in rates in US will raise the borrowing cost and that may lead to some volatility in the market in the short-term as some investors may pull their money out.
Infact, over the last ten trading sessions, barring two days, the markets fell for all others and the Sensex has fallen by a net of 1,187 points or more than 4 per cent. It closed at 28,261 on Friday
So, while short-term players may get impacted by the volatility in the market ensued by the Fed’s decision, it is not something that should bother medium to long-term investors.
“While the markets may see some correction, the market is not too much concerned about the rate hike in US. It is, however, looking at earnings growth as they will drive the next phase of growth in markets,” said Nandkumar Surti, MD and CEO, JP Morgan AMC.
There are some who say that the volatility in markets following Fed’s announcement should be taken as an opportunity to invest.
“It will create short-term volatility and illiquidity which not everyone would be prepared for at the same time. However, since the fundamentals of the economy remain intact and the government seems willing to spend on infrastructure which will take some time to reflect on the ground, it makes sense for medium to long term investors to take the correction in markets as an opportunity to invest,” said Ritesh Jain, CIO, Tata Mutual Fund.
US being the largest economy, if it does well it is good news for the world as it will lift the overall global growth. “India being one of the few countries expected to see a strong earning growth will, in that case, witness a strong inflow of foreign funds over a period of time and hence the short term volatility should not affect investors,” said Harsha Upadhyaya, CIO, Kotak MF.