Why India did not feel the Fed rate hike jitters

Mon, 20 Mar Pre-Open

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The US Federal Reserve raised interest rates for the second time in three months on the back of steady economic growth, job growth and benign inflation levels. The US Fed rate hike was on expected lines with two more rate hikes expected this year.

The rate hike might not impact RBI's policy. It is expected to keep the key rates unchanged in its upcoming monetary policy next month due to rise in inflation.

The redeeming factor is that India seems to be in a better position than other emerging markets to face the impact of higher US interest rates. This is mainly due to its steady economic growth and vast foreign exchange reserves of more than $300 billion.

A fed rate hike implies the US Government bond becomes more attractive for investors as compared to those in the emerging economies. These investors are likely to pull out money from the emerging countries and deploy it in US Bonds. In India's case, the RBI is well positioned to handle such a situation. To counter such short term turbulences, RBI can use its foreign exchange reserves to buy Government bonds. At the same time, gold and crude are two commodities that push up imports and lead to deficits. But with crude prices remaining low, imports are not likely to jump higher and in turn keep the rupee stable.

Therefore, the markets have risen after the rate hike. Recent results in UP have also ensured the general positive sentiment surrounding Indian markets. A stable government with a clear majority is expected to push reforms at a rapid pace going forward. A seamless implementation of Goods and Services (GST) tax will go a long way in improving the operating efficiencies amongst Indian businesses.

Economic activity seems to be picking up after the demonetisation shock in November. Index of industrial production (IIP) rose 2.7% in January, as compared to a contraction of 0.1% in December.

The strong political mandate in Uttar Pradesh has further reinforced the stability of the ruling government. As a result, the stock markets having been scaling new highs each day. This seemed outlandish a year back when we predicted Sensex to touch 40,000 over the next 2-3 years. With recent tailwinds in its favor in terms of economic and political factors, this number for the Sensex is not out of bounds.

Keywords: US Fed rate hike, GST, Sensex 40,000, demonetization, foreign exchange

Description: Strong domestic growth to limit impact of fed rate hike.

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