Forced by rising inflation, the US Fed Reserve yesterday night signaled a rate hike during its 15-16th March meet, very much what the global markets were all expecting. The Fed very clearly spelt out that we will be looking at not just March but a steady pace of increasing interest rates, at a much faster pace than what was anticipated.
The prospect of more interest-rate increases and a shrinking Fed portfolio to reduce inflation has led to heightened market volatility in recent days, prompting investors to sell shares of some technology companies and other risky assets that enjoyed a boom last year.
But then this is not a sudden “breaking news!” This is something we all knew was on the cards and needed for the economy. A rate hike was a given. If it had not happened, it would have been a shocker for the entire world.
What does this rate hike mean for Indian markets? Of course, there will be a sell off! And FIIs will also react by pressing in more sales. A rate hike after years of almost zero interest rate means they lose their arbitrage opportunity from the emerging markets. But then lets look at it the other way – doesn’t this signal that things are slowly getting back to normal and the economy does not need these crutches? Is it better to walk independently, albeit painful initially than remain handicapped with support?
The general fear is that FIIs will scoot from India. This fear is once again too farfetched. All those who wanted to quit are doing it and those who want in, who have faith in India’s growth story will surely still stick around.
And look at it logically. Is our Indian economy so fragile that FIIs leaving will pull out the every foundation of our markets? Why this fear? During the global turmoil, when FIIs were indeed leaving, domestic institutions and LIC held steed. Do you know that collectively they both can hold the fort and LIC’s investment alone is equal to all FIIs put together? And this time, the sheer number of retail investors in the market is mind boggling. So isn’t there enough domestic support to prevent the market falling down into an abyss?
So, let’s be very logical about this. The Fed needs to do what it see’s befitting its country and India, directly will not face a hit. As we keep on reiterating, the entire market runs on sentiments. If the moods turnaround, all this gloom will overnight turn into boom. And to change those sentiments, we will now turn to the Union Budget and that will decide the sentiments.
If the Budget is good, the very same FIIs who are selling now will come back like flies on jalebis!