Indian equities’ near-term fortunes tied to US Fed

Mumbai: The US Federal Reserve's upcoming decision to hike or hold interest rates will play a crucial role in determining the trajectory of not just Indian equities and currency markets, but also of the business confidence in the world's largest economy, experts maintain.

How it may pan out

• A hike in interest rates which have been at near-zero levels since the last decade by the US Fed will send shock waves across the world's capital markets.
• A rate hike could potentially lead to massive amounts of pull-back of foreign funds from the emerging like India.
• US Dollar will strengthen against their currencies, gold and other asset classes.
• However, a rate hike would indicate that the US economy remains on a strong footing. As such, analysts are advising investors to buy during any corrections from a long-term point of view.
• If no rate hike, it would lead to a temporary relief-rally in anticipation of RBI move. But, uncertainty will persist

"The Federal Open Market Committee (FOMC) outcome, if on generally expected lines of no a rate hike, would lead to a temporary relief-rally in anticipation of our own policy rate cuts. But, uncertainty will persist," said Devendra Nevgi, chief executive of ZyFin Advisors.

"But, even a hike broadly would indicate strength in US economy and largely positive for global and emerging markets (EMs) growth in long run," Nevgi said, referring to the policy reviews by the US on Thursday and by the India's central bank on September 29. The FOMC is an arm of the Federal Reserve that sets the direction of the US monetary policy.

According to analysts, a hike in interest rates which have been at near-zero levels since the last decade by the US Federal Reserve also known as the US Fed will send shock waves across the world's capital markets. A rate hike could potentially lead to massive amounts of pull-back of foreign funds from the emerging like India.

US Dollar will strengthen against their currencies, gold and other asset classes, they added. High interest rates in the US are expected to wean away foreign portfolio investors (FPIs) from India. It is also expected to dent business margins as access to capital from the US will become expensive.

Foreign funds have sold around $3 billion, mostly in Indian equities since August. "If the Fed goes ahead with a rate cut this week, we expect some foreign funds outflow in the short term, leading to some volatility and downside from current levels," Vaibhav Agrawal, vice president, research, Angel Broking, said.

This view was expressed by nearly all the market observers that IANS spoke to on the rate hike. "The markets will fall immediately. There will be global bearishness and India will be impacted by it," Gaurav Jain, director with Hem Securities, explained.

On the rupee front, if a hike takes place then a free fall is not being ruled out. Though the Reserve Bank of India (RBI) is expected to intervene and arrest the fall. "If a hike does happen, then the rupee may react bearishly, possibly leading to a new low," said Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services.

Analysts predicted swings of between 65.20-67.10 to a dollar On September 7, the Indian currency closed at 66.82 to a dollar, its lowest levels against the US dollar in over two years. As far as the equities market is concerned, since the peak of 30,024.74 points on March 3, the key sensitive index (Sensex) of the Bombay Stock Exchange (BSE) lost nearly 17 per cent at 25,705.93 points.

Analysys said a hike, on the other hand, will show that the US Fed is confident of the economy's ability to start generating growth and employment. "It (a hike) would indicate that the US economy remains on a strong footing, which would also be positive. So we will advise our investors to buy during any corrections from a long-term point of view," Agarwal said.

The previous data on jobs, house sales and factory output has been evident of a rebound in the US economy. However, data furnished by the US Bureau of Labour, the total non-farm payroll employment increased by 173,000 in August from July's job gains of up to 245,000. The growth in the US economy is important given the slowdown in the Europe and what some observers terming as the start of a "Made in China" world recession.

"More important is the language that the Fed is going to use. A dovish one will support a long sustaining recovery," Banerjee told IANS. "However, a hawkish outlook will heighten the chances of a rate hike in December," Banerjee said.

The silver lining on the cloudy horizon is the hope that the US Fed will maintain interest rates accompanied with a fairly dovish outlook. This, said market observers, will spur the recovery in both equity and currency markets. "The recovery, if it happens will be really strong," Banerjee said. "The rupee can recover to 64-levels. Equities too will see a sustained recovery."

By Rohit Vaid