The Federal Market Open Committee will meet for two days starting on Tuesday, and after continuously raising interest rates for the previous 15 months, it is anticipated that the US Federal Reserve will refrain from doing so this time on Wednesday, June 14. Consumer inflation in the US fell in May for the 11th consecutive month to 4%, which is still above the Federal Reserve’s target of 2%. As a result, economists believe that Fed Chairman Jerome Powell may decide to hold off on raising interest rates because both inflation and the job market considering the unemployment rate dropped to 3.5% in March are still considerably more resilient. Foreign Portfolio Investors (FPIs) invested Rs 43,838 crore in Indian equities in May, which was the most in nine months. Because the RBI has maintained its repo rate and the US Federal Reserve is expected to hold up raising interest rates, the FPI inflows into domestic equities would generate an abundance of market elation.
In the Indian market, foreign institutional investors (FIIs) exhibited strong buying activity, acquiring approximately Rs 1,678 crore worth of Indian cash market. This occurred as the likelihood of a rate hike diminished further due to the Consumer Price Index (CPI) inflation approaching the lower target set by the central bank. On the other hand, domestic institutional investors (DIIs) became net sellers, resulting in an outflow of over Rs 203 crore. “We are in bullish momentum (bull run in Indian market) with the ongoing strong market momentum, there is a possibility for the Nifty top reach a new all-time high but it will take some more time. The support from the global market, particularly the US, combined with robust domestic macroeconomic factors, can potentially give more force in this new record, says V.L.A. Ambala (SEBI Registered Research Analyst), Stock Market Today (SMT).
Sandeep Bagla, CEO Trust Mutual Funds said “The US Fed decision gives an indication about the probable macro trends and the perception of the US Central Bank about growth, inflation and future trajectory of interest rates. The US Fed is likely to hold rates in the June meeting and wait for more data to emerge before undertaking further rate actions. The US Fed decision has a sentiment impact on Indian bond markets, which at times may be significant. The domestic factors like liquidity and inflation outlook determine the trends in local bond markets. The inflow from foreign investors also gets impacted by the US Fed decisions, as foreign investors prefer to remain in dollar denominated bonds if the US rates are high relatively.”
Vinod AN, General Manager & Head Treasury, South Indian Bank said “US Fed is widely expected to pause and hold key policy rates. This pause, if coupled with Dovish or Neutral commentary from Fed Chairman may help the investor to assess the dollar cost in the near future and take investment decision accordingly. This may incentivise investor towards Risk ON asset class. Emerging markets may get additional benefit due to stable USD and domestic growth. India being the fastest growing economy coupled with stable macro factors should attract incremental flows in both forms viz; FPI and FDI.”
Milan Sharma, Founder, 35North Ventures said “In my opinion Fed will take a pause in this meeting of 14 June . It is the commentary of fed, which is important. If the pause is temporary in the cycle of future increases, then it will be negative for emerging markets. On the contrary, if Fed says in commentary that the cycle of the hike is intact and May be in July or Nov again, the rate hike will resume, and then the markets will react negatively. The global macro is not stable, and I feel inflation will again come back in the US, and fed will be forced to hike rate in times to come.”
Sonam Srivastava- Founder at Wright Research an investment advisory firm said “A pause by the US Federal Reserve in its rate hike cycle can have a beneficial impact on the Indian market. This halt indicates the Fed’s comfort with the current rate levels, which subsequently makes Indian assets more attractive to investors due to their higher yield compared to US assets. This can drive up foreign investment in India, bolstering the Rupee and positively affecting the stock market. Moreover, if the Fed starts to cut rates, it can lead to lower borrowing costs in India, spurring business investments and overall economic growth.
On the other hand, a lower Rupee could make Indian exports more expensive and imports cheaper, potentially impacting India’s trade balance and a weaker US dollar could lead to higher commodity prices, which could impact India, a significant importer of commodities like oil.
As of now, predicting the exact timing for a Fed rate cut is challenging, as it depends on many factors such as inflation rates and economic growth. If inflation continues to drop and the economy slows, some economists believe a rate cut could come as soon as September 2023. However, the final decision will hinge on a multitude of economic indicators and Fed’s assessment of them. Thus, it’s important to keep an eye on these indicators for more accurate predictions, Sonam Srivastava further added.
Divam Sharma, founder, and CEO of Green Portfolio – PMS said “Currently, there is an 82% probability of a pause while an 18% probability of a 25bps rate hike in this June meeting. Markets are also predicting that Fed could skip a hike this month and announce a hike in the July meeting. The markets are predicting a 25bps rate cut only by January 2024. A pause should give further thrust to Indian markets in the form of FPI flows. We have already seen the broader markets and indices doing well since the April pause of RBI.”
Commenting on how a pause on rate hikes by the US Fed will attract FPI flows in India, Riddhi Jain, Strategic Partnerships Manager at Revolut and IIT Bombay Alumnus said “The increase in interest rates may lead to a shift in global capital flows, as investors reassess their portfolios. While there may be short-term volatility, India’s strong economic fundamentals, robust growth potential, and investor-friendly policies position it as an attractive investment destination. By proactively addressing concerns and leveraging our competitive advantages, we can capitalize on this opportunity to attract foreign investment and foster long-term economic stability.”
Mr. Harish Menon, Co-founder and head of Investments and product research at House of Alpha said “Basis the recent inflation data in USA, market consensus is for an announcement of pause by the US Federal Reserve. Given that, a hike would come in as a surprise and market could react negatively to it on an immediate basis. However, if we zoom out and see the trend in macro data, it is quite evident that US rate cycle is close to its peak, if not already reached. Market would be more interested in knowing what Fed’s assessment is of the next year or so and thereby gauge when the rates will start to be cut again.”
A R Ramachandran, Co-founder & Trainer-Tips2trades said “Cooling inflation especially in US and India has ensured steady uptrend especially in the Indian stocks with consistently strong FII buying since the past several weeks. However, markets currently are also near overbought levels as the above data has already been factored in the stock prices. Investors should keep booking profits as a market correction looks likely in the coming weeks.”
Anand Dalmia, Co founder & CBO of Fisdom, a wealthtech platform said “Broader markets seem to have factored in a pause by the US Fed. If the outcome is in line, one can expect a neutral to positive impact on Indian markets as the stance would elevate probabilities of a rate cut coming in sooner than later. If rates are lifted, the move would be against broader expectation and possible result in a reaction in form of an outflow of foreign capital. We expect the rates to be held.”
CA Aditya Sesh,Founder and Managing Director of Basiz Fund Service Private Limited said “There will be no major impact of Fed rate hike on Indian equities. To an extent, it may affect large cap investment by FPIs. However, Indian economy is on a good wicket -it is less risky today than before and it has its own USP so managers can look at Indian equities independently. Coming to bonds, Indian issuers may have to pay a tad more to procure them.However, this will be neutralized by an impending review of India’s rating by rating agencies. Finally, the domestic savings of India is at least 5X of the FDI and maybe 3X of the FPI without taking into account its gold savings. Indian trade is also slowly dedollarising. Holistically speaking, this FED rate hike shall not have a major impact on Indian equities.”
Viren Khuller, Director of STIM Oral Care said “A rate hike by the US Federal Reserve could result in higher global borrowing costs, which could affect investor sentiment in emerging markets like India. As interest rates in the United States climb, investors may be tempted to shift their investments to US markets, which are viewed as safer and potentially offer higher returns. This could lead to a drop in Indian market sentiment as international investors cut their exposure to Indian equities and assets. Higher interest rates in the United States may draw foreign capital away from emerging nations such as India. Higher-yielding investors may prefer the US market, resulting in capital outflows from India. This has the potential to harm the Indian stock market and currency exchange rates.”
“When foreign investors withdraw their investments from India, the value of the Indian rupee falls. This depreciation can raise the cost of imported commodities and perhaps lead to inflationary pressures in the Indian economy. It’s important to remember that market sentiment and foreign investment in India are influenced by a multitude of factors, including domestic economic conditions, geopolitical events, global market trends, and investor confidence. The impact of a US Fed rate hike will depend on the specific circumstances at the time and how various stakeholders, including the Indian government, respond to the changing dynamics,” Viren Khuller further added.
Niraj Bora, Founder of Surmount Business Advisor pvt ltd: said “Fed rate hikes should be slowed down as expected / anticipated this time around. I feel market has already factored the same and the future guidance on rate cuts or increase should drive the market movements. Rate hikes enable investors to get better returns back home than overseas, and hence they tend to withdraw investments abroad, pulling developing markets down, and vice versa. This time around, fed is expected to put stop to rate hikes due to somewhat controlled inflation in last few months and the banking challenges faced due to rate hikes. However, the inflation remains beyond proposed levels in US, and rates maybe hiked again in future due to this, that might pull Indian markets down.”
Pamarty Venkataramana is an International Corporate Lawyer in New Delhi India. Chief of PVR Global law said When the US Federal Reserve (Fed) decides to hike interest rates, it can have both direct and indirect impacts on market sentiment and foreign investment in India. Here’s how:
Market Sentiment: A US Fed rate hike can lead to a shift in market sentiment globally, including India. Generally, a rate hike indicates a tightening monetary policy, which can create a perception of reduced liquidity and higher borrowing costs. This can lead to a cautious approach by investors, potentially resulting in a decline in stock markets and increased volatility. It can also affect consumer and business sentiment, impacting spending and investment decisions.
Capital Flows: A US rate hike can trigger capital outflows from emerging markets, including India. When US interest rates rise, investors may find US dollar-denominated investments more attractive, leading to a movement of funds from other countries to the US. This can put pressure on emerging market currencies and create short-term volatility in exchange rates.
Foreign Portfolio Investment: Higher US interest rates can make investments in the US more appealing to global investors. As a result, foreign portfolio investment in India may decrease as investors seek higher yields and lower risk in the US. This can impact the flow of funds into Indian stocks and bonds, potentially leading to a decline in foreign institutional investment.
Foreign Direct Investment (FDI): The impact of US rate hikes on FDI in India can be less direct. Factors such as the overall economic conditions, policy stability, and long-term growth prospects play a more significant role in attracting FDI. While short-term capital flows may be affected by US rate hikes, the long-term investment decisions by multinational companies are influenced by various factors beyond interest rates.
Policy Responses: Central banks, including the Reserve Bank of India (RBI), may respond to a US Fed rate hike by adjusting their own monetary policies. The RBI may choose to increase interest rates to maintain stability in the domestic economy and currency. Such policy responses can influence market sentiment and attract foreign investors who are reassured by proactive measures taken by the central bank.
It’s important to note that the impact of US Fed rate hikes on India’s market sentiment and foreign investment can be complex and depend on various factors, including the overall global economic environment, domestic economic conditions, geopolitical developments, and investor risk appetite. It may be noted that the USA has a huge opportunity for NASDAQ liquidity. Twenty years ago,the US equity market which is global anyway was only ten trillions with 10,000 NASDAQ companies. Today, around fifty trillions and only 3000 NASDAQ deals.Big economies like USA,India,China take time to change. With a great track record Indian businesses have,the great foundation laid can match up to the dynamics of US FED interest rate hikes.
Reference Link:- https://www.goodreturns.in/news/rest-how-a-pause-on-rate-hikes-by-the-us-fed-will-attract-fpi-flows-in-india-1286158.html?story=12