Warning of a shock outflow of foreign capital from Indian markets by IMF chief Christine Lagard, in case the US Fed chief Janet Yellen hints raising interest rates this evening notwithstanding, Indian market experts strongly believe in four things: The long-term equity bull market will remain intact; Markets may correct anywhere between one per cent and five per cent depending on the quantum and frequency of rate hikes in the US; Every blip should be taken as an opportunity to buy Indian equity; The rate hike may happen in June and it will not be more than 25 basis points (100 basis points = 1 per cent).
Any hike in interest rates make investments into dollar-denominated assets attractive and could lead to an outflow of US dollars from emerging markets like India into the US, further strengthening an already-strong US dollar. As emerging market currencies start weakening they induce more capital flight outwards, further weakening them leading to a vicious circle which in 1997 led to the currency meltdown in Asia and subsequently the equity markets.
However, any such situation is extremely unlikely to dawn upon India, feel the market experts Rediff.com spoke to.
Deven Choksey, managing director, K R Choksey, a Mumbai-based brokerage firm, believes that if America is showing some kind of growth then obviously the US Fed will not stay behind in increasing interest rates and sucking out the excess liquidity from the system. But, he argues, the US will not let its currency strengthen vis-à-vis the currencies of emerging markets that depend on US dollars for priming their economies.
“As I see it, America realises that a strong dollar is counter-productive for their growth and it will be in US’s interest not to allow the dollar to gain strength beyond a point,” he says.
However, he warns that in the near term we could see a currency war. “In the near term we are entering an orbit where we will see a currency war largely due to strengthening of the dollar vis-à-vis other currencies. This weakening of currencies could have a huge impact on the different markets of the world,” he says.
At the same time, he is equally confident that the expectation of a high growth rate in India in the next few years has helped us ring-fence an impact of such currency wars.
“I don’t think so,” he says when asked if the Indian economy will be roiled by an impact of a US rate hike and the subsequent weakening of the Indian rupee. “Had there been no growth in the Indian economy the US raising interest rates would have shocked us. But I guess if India’s growth story remains intact, that shock would be absorbed,” he offers as to why India would emerge not too brutally bruised in the next few months.
“The markets will have a reason to fluctuate tomorrow,” he says about the impact of a 25 basis point rate hike by the US Fed this evening. “I think if the Fed hikes rates the market would take a shock till 8500. Importantly, if the rupee depreciates till 64, only in that case can we see the Nifty going below 8500.”
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