What do Fed rate hikes mean for Indian markets?

As the US Federal Reserve (Fed) started its two-day meeting on Tuesday, consensus factors in a no hike in rates from this meet. As the Street awaits the outcome of this meet on Wednesday, a look at the historical correlation between a Fed rate hike and the performance of Indian markets throws some interesting insights.

"Historical analyses of Indian market returns post US Fed's rate hikes show that equities have tended to do well - market returns were positive in most cases when the US hiking cycle began. Market returns in the immediate run-up to the start of the hiking cycle have been mixed," write analysts at Citigroup in a recent report.

Notably, markets fell two per cent on the day of the Fed rate hike in February 1994 but moved in a range-bound manner during the following rate hikes. In the last rate hike on December 15, 2015, markets fell sharply before the hike but inched up 0.7 per cent on the day of the hike. Since this hike, markets surged nearly 13 per cent.

A study by Citigroup highlights that the last five Fed hike cycles also coincided with periods of high EPS growth for the Sensex. They believe a rate hike is likely only in December and that future hikes will be shallower. The brokerage is positive on the Indian markets and will use any dip to buy.