Here's how another Fed rate hike will impact the Indian markets

The US Federal Reserve is most likely to increase its overnight interest rate by 25 basis points in the next Fed meeting scheduled for July 26. After breaking the 11-month streak of increasing the interest rate last month, Federal Reserve may continue to increase it once again to control inflation in the country. 

Even though the US recorded the lowest inflation rate in the year in July, the Fed can continue to keep efforts up to tame inflation further. As per YCharts’s US inflation data, the current inflation rate is at 2.97 per cent, compared to 4.05 per cent last month and 9.06 per cent last year. This number is even lower than the long-term average of 3.28 per cent and the Fed’s target of below 3 per cent. 

According to a 106 economists poll by Reuters, most are of the opinion that July could observe the last increase in interest rates in the current tightening cycle. 

The reason cited for this speculation is the sticky underlying inflation and Fed Chair Jerome Powell’s remarks on further increases in interest rates. 

"We did take one meeting where we didn’t move," Powell said during an event held by the Spanish central bank in Madrid. "We expect the moderate pace of interest rate decisions to continue."

Impacts of further Fed rate hikes on Indian markets

Fed rate hikes are never great news for Indian markets as with better interest rates, foreign investors choose to withdraw their money from developing markets and fetch better returns from US bonds.

"As long as the rate hike remains within the expected range and there are no surprises, we anticipate that the market will take it in stride without experiencing massive disruptions. While some capital outflows and fluctuations in currency and stock markets might occur, overall, the impact is likely to be manageable,” Sarvjeet Virk, Co-founder and MD, Finvasia, told Republic.

Indian markets are expecting an interest rate hike in the next Fed meeting | Image credit: ANI

Following the Fed's rate increase, there might be some volatility in the Indian markets. However, the likelihood of experiencing a significant selloff in Indian stocks and currency is low, given the robust outlook of the domestic market for the medium to long term.

However, if the rate hikes exceed or fall shorts of the market expectations, markets can witness a major swing. The expected rate hike can further strengthen the dollar and put some extra pressure on the Rupee which is currently hovering around 81.9. 

Take profits where returns are decent: Aamar Deo Singh, Head Advisory, Angel One

While talking to Republic about the anticipated Fed rate hike, Aamar Deo Singh, Head Advisory, Angel One Ltd, said, “A 25 basis point rate increase by the US Federal Reserve at its meeting on July 26 has been priced in by markets on a global and local level. The Fed's future outlook on inflation will, however, be of considerably greater relevance.” 

“Expectations that this might be the last rate hike have helped to boost markets during the past few months. Investors are however encouraged to exercise caution and vigilance and should consider taking profits where the returns are decent,” Singh added.

A stronger dollar can have significant implications for India's economy. As the dollar strengthens, it makes imports more expensive for the country, potentially widening the current account deficit. This deficit arises when the value of imports exceeds the value of exports, impacting the nation's overall trade balance.

Talking about the impacts of the upcoming Fed rate hikes on Indian markets, Ruchir Sinha, Managing Partner, Resolut Partners told Republic, “Globally as well as in India, rate hikes are likely to have a direct and proportional impact on the activity of annuity investors looking to tap stabilized returns.”

“From an Indian investment perspective, this is naturally interesting. SWFs, pension funds and other annuity investors are likely to enhance their allocations towards stabilized yield-generating real estate and infrastructure assets such as REITs and InvITs. What is also interesting to see is that the Indian rate hike is disproportionately lower than the US Fed hike indicating strength in the Indian economy,” added Sinha. 

Furthermore, if the Indian rupee depreciates against the dollar, it can escalate the cost of servicing India's external debt, which is mainly denominated in US dollars. This situation can increase the burden on the country's finances, as it needs to allocate more rupees to repay dollar-denominated debts.