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Thursday, December 09, 2021

Indian markets shrug off US Fed rate hike

Both the benchmark indices – Sensex and Nifty – actually rose in early trade and continue to trade in the green.

Written by Udit Misra | New Delhi |
December 17, 2015 12:09:35 pm
fed rate hike, indian markets, markets today, sensex, nifty, BSE sensex, business news, market news A man walks by an electronic stock board of a securities firm showing the benchmark Nikkei 225 index in Tokyo, Monday, Dec. 14, 2015. (AP Photo/Koji Sasahara)

As expected, the US Federal Reserve, America’s central bank, raised the interest rate by 25 basis points. One percentage point is made of 100 basis points. This is the first rate hike in US since 2006 and is significant as it reverses the trend since 2008 financial crisis. In the wake of the crisis, the Fed had not only brought down the interest rates to zero but also introduced close to $3.5 trillion in the money supply (called quantitative easing or QE) to kick-start growth. The QE tap was turned off in October 2014. Now the interest rate cycle has been turnaround. This has implications not just for the US economy but also for other economies, especially the emerging markets.

One, the US economy has come out of the rut that the 2008 financial crisis had created. The unemployment numbers are heartening enough for the Fed Chairperson Janet Yellen to include inflation as one of her key concerns going forward, as against the sole focus of growth promotion until now. The US is an economic bellwether. Its resurgence presents a sunny prospect that global economy might improve sooner than later.

A growing US economy will result in an uptick in the exports of countries like India and China, helping them grow along as a consequence. But a sustained US growth will also raise commodity prices, oil in particular, as the demand for goods picks up. This would have an impact on the inflation that a heavy oil importer country like India has to deal with. Oil imports constitute one-third of India’s total imports.

Lastly, an increase in the interest rate, as well as similar hikes across 2016, will imply that many investors will abandon the emerging economies like India and go back to investing in the US. Such an outflow of capital will result in creating a liquidity crunch for several companies in economies like India. It will also result in domestic currencies depreciating against the dollar. So central banks across the board will have to adjust their monetary policy levers depending on their desired exchange rate. They will have to let go of the accumulated foreign exchange if they want to stop the domestic currency from depreciating beyond a certain point.

As far as India is concerned, it appears that the markets have shrugged off the rate hike. Both the benchmark indices – Sensex and Nifty – actually rose in early trade and continue to trade in the green. There will of course be pressure on the rupee in the days to come since there will be some outflow of capital. However, just like in the case of the QE tapering down, the actual news is less debilitating than the apprehension. For instance, the mere expectation of a rate hike had resulted in foreign institutional investors withdrawing $ 1.64 billion in November alone. In fact, in the first fortnight of December, the outflows were again close to a billion dollar. As of Tuesday, the rupee breached the psychological threshold of 67 to a dollar. Going forward, observers believe that the further depreciation may not happen, as the RBI would intervene.

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