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Is there a fed rate hike looming over the markets?

11 Nov 2014 |By: Team Finalaya

fed rate  hike

It has now been some 5 years since the U.S. is following the easy money policy with near zero interest rates and the bond buying program or Quantitative easing program.  This policy initiative followed the global economic meltdown witnessed towards the fag end of 2008. The QE taper has already begun and the last leg is expected to be over sooner than later.

Where would the US interest rate pitch?

Various reports from the US claim that unemployment rates have dropped to a 5 year low and the economy is showing signs of perking up. The tone for a complete withdrawal of the QE program has been set and a rate hike is now predicted to take place any time during mid 2015.  But, where the US interest rate will pitch is anybody’s guess for now.

Knee jerk reactions should be expected

There can be no doubt that the rate hike when it comes, will trigger at least some knee jerk reactions across global markets. Before Diwali 2014, we already witnessed significant sell offs in the Indian as well as global markets.  In comparison to other emerging markets, the Indian capital market was perhaps only waiting for a ‘whipping boy’ to trigger the correction that has been long overdue. The fed rate hike as and when it happens will take away another chunk of FII money from the markets. But, the noise being created around that has the potential to hurt the small investors.

Read More - India well prepared to deal with rate hike by the Fed

Plenty to cheer for the Indian capital markets

The Indian capital markets have plenty to cheer although the stock indexes may remain subdued.  Oil has cooled off significantly and it is expected to remain around the $80 per barrel mark for some time to come. OPEC is more worried about the influence of Shale gas in the overall basket and now they are focusing on retaining market share rather than holding the price line.  The cascading effect from a 20% plus drop in crude prices will eventually bolster the numbers for a wide array of businesses. We must however remember that in India businesses are somewhat hesitant to pass on the benefit to consumers when input prices tend to drift lower.

Government initiatives in the offing

The rate hike expected in mid June 2015 should also rhyme in with an array of positive government initiatives coming in via the 2015 fiscal budget. Some of the measures are already underway and will reflect on the fundamental strength of the Indian capital market. Bullion prices continue to look southward and any upswing should remain limited to the Diwali season. The government is not expected to soften its stand on gold imports considering its impact on the CAD target. Therefore, gold gaining any upward traction in the immediate future is difficult in the Indian as well as the global markets.

Summing up, any threat from a potential Fed rate hike is more likely to turn into an opportunity for the small investors to take fresh positions. Let us not forget that the Nifty made heady gains riding on the Modi wave post mid May. Some corrections coming in, therefore should be very healthy for the markets.

Let us know what you think of the article by commenting below.

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