FEDERAL RESERVE

Federal rate hike not surprising

Federal-Rate-Hike A pedestrian checks his mobile phone as he walks past a bank offering attractive foreign exchange rates in Mumbai | AFP

Now that the US Federal Reserve finally decided to raise interest rates for the first time since 2006, Indian markets have chosen not to react to it, and expectedly so.

The Fed rate hike scare has been around since the early part of this year. It peaked twice, in June and September, and by the time December 16 came, not even the most optimistic proponent of an easy money regime was expecting anything but a hike. In market outlook presentations from brokerages and asset managers, made days ahead of the most recent Fed meeting, the action constituted no more than a footnote.

The reason for this is simple. Markets across asset classes had priced it in. In other words, traders in stocks, bonds and other securities knew this was coming and thus the prices of these assets had fallen in anticipation of the event long before it happened, as is their wont.

What may actually matter, analysts say, is the pace of the Fed’s tightening policy. A very rapid rate hike cycle could spell havoc for emerging markets like India, as global investors would cease to find these attractive investment destinations. Their currencies could depreciate considerably against the ultimate safe-haven asset class—the dollar. And this is unlikely for that very reason.

The challenge, in fact, may come from the divergent monetary policies of different central banks. As the US raises rates, the European Union and Japan have chosen to continue with their quantitative easing programmes. The interplay of these policies could determine the course that a significantly weakened global economy takes.

Most analysts expect global demand to remain tepid. Some are calling low global growth and inflation the “new normal”. At least one thinks we could see a recession in the next two to three years.

Where does India fit into this? The broad consensus out there is that the drivers for India over the next calendar year will be largely domestic. A recent presentation by the Indian arm of Credit Suisse pointed out that most stocks among the top 100 companies on the BSE did badly this year as almost 53 per cent of their revenues are dictated by factors not linked to India. That trend might continue into 2016.

A strong boost in domestic consumption could come from the implementation of the Seventh Pay Commission’s recommendations. A growth in demand for consumer durables is expected across segments and companies which have been reeling under the effects of a slowdown in rural India may get some relief. On the flipside, it may result in a spike in inflation.

The manufacturing and infrastructure sectors may have yet another bad year as commodity prices remain low, capacity remains unutilised and balance sheets remain highly leveraged. A transmission of the rate cuts effected by the RBI may have a positive impact on credit growth over time.

The rupee is likely to maintain its depreciating bias against the US dollar in order for Indian exports to stay competitive at a time most exporters are depreciating their currencies.

On the whole, India has so much to keep it occupied that the Fed event seems to be done and dusted, at least for the time being.

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The Week

Topics : #economy | #Inflation

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