US Fed hike should give a boost to Indian markets: What analysts have to say

Though a 25bps hike is factored in, analysts do not rule out a knee-jerk reaction. However, they still remain bullish on the road ahead for Indian markets

Global financial markets are keenly waiting for the outcome of the US Federal Reserve (US Fed) meeting, for a possible hike in interest rates. Most experts believe that the US Fed will hike rates by 25 basis points (bps) in its December policy review and will also hint at the road ahead for similar moves going into calendar year 2017 (CY17).

A hike in rate (if it happens) will be the first in CY16 and the second in the last 10 years – after a 25 bps hike in December 2015. Though the hike is likely to see a knee-jerk reaction from the global financial markets, analysts say that the markets are already factoring in the possibility.

“Recent economic data has passed the US Fed’s three tests for a rate hike - a pickup in GDP growth, continued labour market improvements and raising inflation - and markets have responded positively to the outcome of the elections. This has meant that a 100% chance of a hike at this meeting is being priced in,” says New York – based Philip Marey, senior US strategist at Rabobank International.

“It does remain to be seen, however, whether the decision will be unanimous as the September dot plot showed that three participants did not expect a hike at all this year,” he adds.

Post the outcome of the US Presidential election, the Dow Jones industrial Average index (DJIA) has rallied nearly 9% and is within striking distance of the 20,000 mark. The rally comes on the back of a hope that President-elect Donald Trump will help push growth-oriented policies once he assumes office in the world’s largest economy.

"On a standalone basis, US economy does call for a higher rate hike, but the US Fed will not take an aggressive stance and would go for just 25bps rate hike, taking into consideration the other global economies," suggests G. Chokkalingam, founder & managing director of Equinomics Research & Advisory.

Given that the event is largely priced in, analysts remain bullish on the road ahead for Indian markets going into calendar year 2017.

“US Fed hike should give a boost to Indian markets. India will largely be insulated from FII outflows, as the money coming to Indian equities is not the same chasing debt instruments in US. The kind of returns foreign investors made in India in the long-term are not comparable to what they may have generated by investing in US debt instruments during the same period,” Chokkalingam adds.

Analysts at Bank of America Merrill Lynch, too, are of the view that US recovery is positive for India in the medium-term even though markets may initially sell emerging markets (EMs) if the US Fed is perceived to be more hawkish than expected on Wednesday night. 

"There are three reasons for this. Firstly, US recovery boosts export demand and supports growth. Second, US Fed rate hikes will continue to rein in global commodity prices that helps stabilise India's 'imported' inflation. This, in turn, allows the Reserve Bank of India (RBI) to cut rates to aid recovery. Finally, Higher risk appetite for high-growth BRICs will support the rupee as Fed rate hikes will re-affirm growth," points out a BofA Merrill Lynch Global Research report.