Is India Ready for the Fed Rate Hike?

Mon, 14 Dec Pre-Open

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The most anticipated and debated event for the global financial markets is almost here. The financial world is nervously awaiting theUS central bank's upcoming policy meeting on 15-16 December 2015. Will the US Federal Reserve finally hike interest rates?

Let us tell you that if the rate hike goes through, it will be the US central bank's first interest rate hike in nearly a decade.

You will recall that the US Fed has been planning the interest rate hike since quite some time. But so far it has been unable to increase the rates because of economic growth and unemployment reasons. With these factors showing signs of improvement, there is growing consensus that the US will hike interest rates this time around.

And this can be seen from the way the global markets and currencies have been moving in recent times. The US dollar has been strengthening against all major currencies. Major stock markets across the globe have been sliding lower. This is a clear sign that the markets are anticipating a rate hike to happen this time.

As you may have noticed in recent weeks, the benchmark Indian indices as well as the Indian rupee have been on a downward slope. It means that foreign investors are switching from Indian rupee to the US dollar. It is important to understand that as a thumb rule, money flows where the interest rate is on the rise. In India, we have seen a slew of policy interest rate cuts by the RBI as inflation levels have come within comfort levels. With the strong prospects of a US interest rate hike, foreign investors are switching back to the greenback.

If the US Fed interest rate hike is announced this week, how will it affect the Indian stock markets? What are the factors that investors should focus on?

Many market participants expect that the US Fed will hike interest rates by about 25 basis points. But this is not the only factor that market participants are worried about. The comments that Fed members make at the policy meet will be critical. Investors will seek to gauge the prospects of future interest rate hikes. Will the Fed go slow on future rate hikes? Or will it set a strong agenda for a series of rate hikes in the coming times?

So, it is really uncertain how the global markets will react after the Fed's meeting this week. One thing is for sure. The markets are going to be quite volatile.

In conclusion, we would like to quote the recent comments of RBI Governor Raghuram Rajan:

'I think going forward the best defense against global volatility is sound domestic policies. So, in another words don't worry so much about what is happening outside, but make sure that what you are doing inside is sensible and create the atmosphere of small and sustainable growth.'

In our view, this is the best advice for policy makers and investors. We should be less focused on external factors that may result in medium term uncertainty and volatility. The real factors that will drive long term returns on investments are within our economy. Are we setting the right policies that will create conducive climate for economic growth and development? Are we carrying out the much needed reforms to cut out the inefficiencies, roadblocks and dysfunctionalities from the economic system? Are we making the necessary investments in improving the country's infrastructure and human capital? In the long run, it is these questions that will shape the destiny of our economy.

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