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5 ways US interest rate hike affects India
The Federal Reserve, the US central bank, announced a 0.25% increase in interest rates this week. This is the first such rise in nearly a decade, after continuing a near-zero-rate policy. This has been widely anticipated for months together now.
Earlier, there were worries that such a hike could lead to large-scale foreign outflows from India leading to a market crash. However, Indian stocks took the announcement in stride. Markets opened higher after the announcement.
Keeping this new development in mind, here’s how you can play the markets:
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Rupee to be stable
The Indian currency has been inching closer to the Rs 67-to-a-dollar levels the past few sessions. Going forward, though, analysts expect it to be stable. This is mainly because foreign investors are unlikely to exit from their investments in India as they had in 2013. In fact, credit ratings agency, Moody’s, expects the Indian rupee to be the least exposed to depreciation, according to media reports.
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Focus on Indian economy
In 2013, India was the worst affected after the US Fed announced the rollback of its ‘Quantitative Easing’ policy. Today, however, India is likely to be the least affected party amongst all emerging markets. This is because of the inherent strengths in its economy like higher growth rates, falling inflation, and government reform measures. Moreover, India is positively affected by the fall in global oil prices. All these factors could help corporate profit growth. This is why investors are likely to focus on companies benefited by these factors like auto, infrastructure and capital goods companies.
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Domestic investment
In the last one year, domestic investors have returned to the Indian equity market in droves. With inflation falling, consumers are saving more. These savings, in turn, are being directed towards equities. As a result, even if a few foreign investors exit, domestic investment will likely support the markets.
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US-based sectors to do well
The US interest rate hike reflects that the US economy’s recovery is now well entrenched. This bodes well for Indian companies in the US. Pharma and IT companies in India get most of their revenues from the North American market. With a stable rupee, these companies could benefit.
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RBI rate cut
The Reserve Bank of India has regularly worried about the potentially negative effects of a US Fed hike. If it sparked a huge FII outflow, it could have harmed the Indian economy. With this uncertainty out of the way, and if inflation remains weaker than RBI’s forecast, then it gives the central bank further headroom to cut interest rates. This could potentially give a fillip to demand for auto and home loans, which should be a positive for private sector banks and non-banking finance companies (NBFCs).
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0.5%
The US Federal Reserve could hike interest rates by another 0.5% in 2017, according to Kotak Securities estimates. However, this could depend on the strength in the economic recovery going forward as well as the employment data.
