The buzz about the Federal Reserve (Fed) of the United States deciding to hike interest rates went on for a while. However, against the expectations of many, the Fed has kept rates unchanged being concerned about the economic outlook and progress within the U.S. along with other external factors. However, members of the Fed are putting the cards on the table for a rate hike at the end of the year citing continued improvement in the domestic economy and low unemployment. Foreign investors were wary of the effects a Fed rate hike would have on Indian markets, although the Feds decision to postpone raising rates allayed their fears. FII’s have pulled out Rs 19,263 crores from Indian markets over the last one month.

The Fed’s decision on 17 September, 2015 to postpone raising rates provides temporary relief to Indian markets. The Fed has not provided any guidance on when would it raise rates, nevertheless it has hinted that whenever rates are hiked, they will be hiked keeping in view long term objectives of maximum employment and inflation target of 2%. There is an air of uncertainty as to when exactly the fed will go about raising rates as many are of the opinion that the fed will hike rates sometime early next year based on the Fed’s deliberations. However,a few members of the Fed have contended the case for a rate hike as soon as the end of 2015.

In today’s world of financial integration, India cannot be shieldedfrom the effects of the monetary policy of United States. Dollar carry trade has been one of the primary reasons why Indian markets have been sustaining rich valuations. Resolution on issues pertaining to FII taxation and introduction of investor friendly policies under new FPI regulations have been keeping FIIs excited about India. However, it remains to be seen what happens to Indian markets when the easy money dries up.

How the monetary policy of the United Statesmay impact India?

• On a broader scale a hike in interest by the Fed will affect emerging markets including those in India
  
  
• As long as real interest rates in the U.S. remain near zero, dollar carry trade may keep driving emerging markets. However, unwinding of loose monetary policies may trigger a sell-off in emerging markets
  
  
• Emerging market currencies will face significant pressure. A stronger dollar will result into a weaker rupee
  
  
• If FIIs exit emerging markets on a large scale, value of domestic currency in respective nations would come under further pressure. India will be affected too
  
  
• Weaker rupee also diminishes returns for Foreign Institutional Investors (FIIs) which will reduce the appeal of Indian markets globally
  
  
• The indirect effects will also be prominent as a rise in US interest rates will result in increased cost of capital for the Indian borrowers seeking foreign funding. Many Indian companies have large unhedged dollar denominated loans. Sudden jump in the value of dollar and increased cost of capital may affect their balance sheets negatively
  
  
• Weakening of the rupeemay affect Indian importers andmay even widen India’s current account deficit, if exports fail to revive
  
  
• On the positive side, exporters will benefit along with multinational companies looking to invest in India.
  
  
• India, being a net importer may benefit from lower commodity prices including those of the crude oil.Outlook of most of the industrial commodities remains weak, painting a bearish outlook for commodities
  
  

Is there anything to worry about?

PersonalFN believes, there is no point in speculating about when the Fed will hike rates. A rate hike of about 25bps (0.25%) has already been factored in. There is still a possibility that the Fed may gradually raise interest rates starting from later this year, thereby ending the era of easy money. Fed President James Bullard, St Louis, quoted that “to postpone the rate hike until next year will create rather than reduce global macroeconomic uncertainty.”Even if the Fed raises rates this year, India is better equipped to handle this situation as corporate growth is starting to pick up and lower international commodity prices are set to work in its favour. So far India has been least affected among emerging markets.Going forward, there are factors that willhelp Indiato minimise the impact of the policy decision of the Federal Reserves.

PersonalFN believes investors shouldn’t get panic by the market volatility. You should keep investing as per your asset allocation plan chalked out after taking into account your risk appetite and long term financial goals.

In its exclusive report ‘Top 5 Mutual Funds for 2020’, PersonalFN has listed 5 mutual funds where one can invest in such uncertain markets.

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