How India Will be Impacted if US Hikes Rate for First Time in a Decade

The possibility of the first rate hike in the US in nearly a decade has led to nervousness among domestic traders and investors. Most analysts fear a kneejerk reaction in Sensex and rupee as domestic markets open for trade on Friday in the event of a rate hike announcement in the US tonight.

Here are 10 things to know about the development

1) The Federal Reserve kept rates near zero since December 2008 in a bid to kick-start the US economy. The sustained low interest rate regime led to inflow of liquidity across the globe.

2) With the exception of 2011, foreign investors have been net buyers of domestic equities in the last five out of six years since 2009. In 2014, they pumped in a record Rs 2.56 lakh crore in equities and debt fueling a rally that took the BSE Sensex to an all-time high above 30,000. The rupee was the best-performing emerging market currency last year.

3) If the Fed hikes rates, some foreign investors are expected to book profit in their holdings in Indian shares and bonds; they will likely repatriate funds back to the US, where buying high interest rate bearing bonds will become an attractive bet.

4) Selling by foreign investors has a large impact on Sensex and Nifty because they mostly own shares that are constituents of these blue chip indices. According to Kotak Institutional Equities, foreign investors own nearly 25 per cent of BSE-200 shares.

5) The prospect of a rate hike in the US had led foreign investors to sell equities worth over Rs 20,000 crore since August 1. This has resulted in 8 per cent correction in the Sensex. Indian markets have fallen sharply despite aggressive buying by domestic funds.

6) The US dollar has strengthened and emerging market currencies like the rupee have weakened on concerns of a rate hike in the US. The rupee has shed nearly 4 per cent since August 1 from 64.13 to 66.46 per dollar.

7) Foreign investors could dump $5 billion in equity and debt in a time frame of 15 days to 1 month after the first rate hike, according to Mumbai-based NSP Treasury Risk Management.

8) The Nifty could test September lows of 7,539, and in the worst-case scenario fall to as low as 7,200 if the Fed hikes interest rate in the US, traders say. The rupee could hit a low of 67.80 per dollar in the aftermath of a rate hike in the US, said NSP Treasury Risk Management.

9) Some economists fear that the Reserve Bank of India may not cut interest rates at a scheduled policy meet later this month to make investing in Indian bonds attractive exciting for foreign investors.

10) The impact of a rate hike in the US on India will be limited because of strong fundamentals, analysts say. In 2013, India saw $12 billion in outflows from May to September due to US rate hike worries. A record high current account deficit, double-digit inflation and record-low rupee led to large-scale destruction of shareholders’ wealth back then.

(With inputs from agencies)