India Markets reaction To U.S. Fed Rate Hike

The Federal Open Market Committee’s (FOMC) will announce its decision on the federal fund rates later in the day but consensus suggests that a rate hike of at least 25 basis points is practically a foregone conclusion.
The last time the U.S. Federal Reserve raised rates was on December 16 last year, by 25 basis points to 0.5 percent. That was the first rate hike by the central bank since 2006. While markets remained more or less sanguine in the run-up to the decision, some short-term volatility was seen in the immediate aftermath.
India Markets reaction

In The Run Up To The Last Fed Rate Hike

There was little change in major indices like the Nifty 50 index and a broader market index like the Nifty 500 in the run up to the Fed rate hike last year. Both indices remained rangebound for 1-3 months prior to December 16, 2015.
However, foreign portfolio investors pulled out money from both equity cash and debt markets. A month prior to the Fed’s decision, FPIs sold stocks worth Rs 9,401 crore ($1.4 billion) in equity and sold debt securities worth Rs 5,860 crore ($882 million) on a net basis.
In the same period, the Indian rupee weakened by only 1 percent against the U.S. dollar despite outflows from the debt and equity markets. The rupee had declined less than 0.5 percent for the period 3 months prior.  

Following The Last Fed Rate Hike

What followed was a month of volatility and weakness in Indian equities. The Nifty 50 declined by 4 percent and the Nifty 500 index fell by over 4.2 percent in just one month. FPI outflows, however, had reduced considerably in the same period with a net outflow of Rs 2,062 crore ($300 million) in equity and Rs 911 crore ($149 million) in debt. The rupee had further retreated by a little over 1 percent in that month.
Six months on however, the losses had reversed with the Nifty registering gains of 1.4 percent and the Nifty 500 moving up by 1 percent. FPIs too had returned to the equity market with net buying worth Rs 16,624 crore ($2.54 billion) in the period. FPIs however continued to sell in debt markets and posted a net outflow of Rs 4,589 crore ($643 million) in the same time.
Nearly 12 months since the Fed’s last rate hike, these variables have changed substantially. The Nifty 50 has gained over 5.8 percent with broader Nifty 500 outperforming, up about 8 percent in nearly one year. FPIs have since invested Rs 31,227 crore ($4.77 billion) in the equity market but withdrawn more than Rs 46,085 crore ($6.72 billion) from the Indian debt market. The Indian rupee is the only variable which has come back to nearly the same levels posting a decline of just 1 percent since the last Fed rate hike.  

The Current Backdrop

The Indian equity market has been volatile over the last month on account of external as well as domestic factors. November saw a surprise win for Donald Trump in the U.S. presidential elections which triggered volatility in all emerging markets. Additionally, the Indian market was exposed to the Modi government’s demonetisation measures which led to sharp declines in the weeks following the event. The equity market has since stabilised with FPIs returning only in the last few days. Much of the market movement over the next few days may be left of Fed chair Janet Yellen’s commentary on the central bank’s future course of action.

The Author

Pramod Baviskar

Professional Market Trader And Owner Of Dalal Street Winners Advisory And Coaching Services. Working Since 2007 And Online Presence Since 2010. We Provide Highly Accurate And Professional 1 Entry And 1 Exit Future, Option, Commodity, Currency And Intraday Stock Tips On Whatsapp With Live Support And Follow Up.
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