What shock? India can absorb hike in US interest rates, say market experts

Warning of a shock outflow of foreign capital from Indian markets by IMF chief Christine Lagard, in case the US Fed chief Janet Yellen hints raising interest rates this evening notwithstanding, Indian market experts strongly believe in four things: The long-term equity bull market will remain intact; Markets may correct anywhere between one per cent and five per cent depending on the quantum and frequency of rate hikes in the US; Every blip should be taken as an opportunity to buy Indian equity; The rate hike may happen in June and it will not be more than 25 basis points (100 basis points = 1 per cent).
 
As US Fed chief Janet Yellen will read the minutes of the Federal Open Markets Committee today, equity market participants globally will lend her ears to get a sense as to when and by how much will she hike interest rates in the US.
 
Any hike in interest rates make investments into dollar-denominated assets attractive and could lead to an outflow of US dollars from emerging markets like India into the US, further strengthening an already-strong US dollar. As emerging market currencies start weakening they induce more capital flight outwards, further weakening them leading to a vicious circle which in 1997 led to the currency meltdown in Asia and subsequently the equity markets.
 
However, any such situation is extremely unlikely to dawn upon India, feel the market experts Rediff.com spoke to.
 
Deven Choksey, managing director, K R Choksey, a Mumbai-based brokerage firm, believes that if America is showing some kind of growth then obviously the US Fed will not stay behind in increasing interest rates and sucking out the excess liquidity from the system. But, he argues, the US will not let its currency strengthen vis-à-vis the currencies of emerging markets that depend on US dollars for priming their economies.
 
“As I see it, America realises that a strong dollar is counter-productive for their growth and it will be in US’s interest not to allow the dollar to gain strength beyond a point,” he says.
 
However, he warns that in the near term we could see a currency war. “In the near term we are entering an orbit where we will see a currency war largely due to strengthening of the dollar vis-à-vis other currencies. This weakening of currencies could have a huge impact on the different markets of the world,” he says.
 
At the same time, he is equally confident that the expectation of a high growth rate in India in the next few years has helped us ring-fence an impact of such currency wars.
 
“I don’t think so,” he says when asked if the Indian economy will be roiled by an impact of a US rate hike and the subsequent weakening of the Indian rupee. “Had there been no growth in the Indian economy the US raising interest rates would have shocked us. But I guess if India’s growth story remains intact, that shock would be absorbed,” he offers as to why India would emerge not too brutally bruised in the next few months.
 
“The markets will have a reason to fluctuate tomorrow,” he says about the impact of a 25 basis point rate hike by the US Fed this evening. “I think if the Fed hikes rates the market would take a shock till 8500. Importantly, if the rupee depreciates till 64, only in that case can we see the Nifty going below 8500.”
 
“I

would not go that far to think that a rate hike would lead to a shock but a temporary blip if the reform process does not happen as expected. All being equal, lot of it (rate hike) is already built in. A rate hike will be a landmark in that it will further strengthen the dollar. As it is a strong dollar has already spooked the emerging markets,” says Jagdish Malkani, NSE member. 
 
Malkani avers that markets are too smart and depending on the language that the Fed chief uses tonight, the markets might start correcting immediately even as the actual event happens in June. 
 
“While it will take a lot to shake the structural bull market that we are in (right now), but in case the market senses a 0.25 per cent rate hike in June (instead of September) we will see a 5 per cent correction in the Indian market. Take it as a temporary blip offering a buying opportunity for long term investors,” he advises those who are in the Indian market for a long haul.
 
Independent market analyst and a veteran of the Indian stock markets S P Tulsian feels that the US Fed chief will not talk about any rate hike till September. 
 
“Firstly, I am not expecting any rate hikes to happen before September but even if that comes in June then it will be marginally negative for our market and the ensuing correction may last only a day or two,” he adds.
 
Tulsian counters that a rate hike may be bad for emerging markets but you cannot apply the same yardstick to India because we are in the midst of a rate-cut regime now. “We will be seeing as many as six rate cuts in the next 18 to 24 months,” he says. 
 
Also, Tulsian argues that only the $60 billion that has entered Indian debt market might fly out (in search of higher yields from US Treasury bonds) and foreign institutional investment in the equity markets will not be impacted much. 
 
Independent stock market analyst Ambareesh Baliga opines that In India we have already discounted a 0.25 per cent rate hike. Such a hike could lead to an immediate reaction but only for a day or two, he says.
 
“I don’t see a major reaction. Nifty may dip by 100 or 150 points.”
 
Baliga feels that the Indian equity markets will be in a consolidation mode for the next six months. The reason: “March quarter results will not be very great. They will be worse than December quarter. All these events (Fed rate hike, depreciation of Indian currency and poor March quarter results) will keep pressure on the market and should provide an opportunity for those who want to enter the market.”
 
Baliga sees the Indian Nifty, a benchmark index, hovering in the 8400-9000 range going ahead. He doesn’t feel that we can surpass the highs of 9100 on Nifty we saw the day the RBI governor Raghuram Rajan snipped repo rate (the rate at which RBI lends money to the banks) by 25 basis points soon after the Union Budget.
 
“We should see the market gaining some momentum post June quarter number starts coming in. The monsoon is expected to be normal this year and the economic reforms initiated by the Modi government would start yielding concrete results by September-October,” he says.