Urjit Patel says US rate hike worries in 2017 mostly priced in by Indian markets

Global equity markets continue to remain in a fragile state, especially after Donald Trump took office. The Trump factor has kept investors on tenterhooks over his electoral promise to undertake more protectionist policy measures going ahead. Back home, stock market investors who steadily sailed through the home-induced demonetisation exercise, have more reasons to worry on the global front.

Besides keeping a close watch on Trump's policies, other major hindrance could be further rate hikes by the US Fed during the course of the year. As it is, a culmination of note ban impact and hardening of interest rate prospects in the US has already triggered massive outflow of foreign funds from the Indian markets in the last few months.

The US Federal Reserve has already increased its key interest rate by 0.25 percent in December 2016, and has signaled that more rate hikes could be on the way in 2017.

The question is, will the Indian stock markets witness a flurry of selling activity during the year as and when the US Fed undertakes a rate hike?

RBI Governor Urjit Patel

RBI Governor Urjit Patel

The mood could be cautionary, but Indian stock markets may not exhibit pessimism due to rate hike worries in the US. In fact, Reserve Bank of India governor Urjit Patel also feels shift in US policy stance is already priced in.

In an interview with Rahul Joshi, editor-in-chief of Network18 Group for CNBC and MoneyControl.com, Patel said, "The Fed had indicated in December that there would be two, possibly three hikes in 2017. So, a fair bit of that is priced in. Given that financial markets are forward looking, from that source alone I would expect (and I would underline the word ‘expect’) the repercussions may not be that much as compared to when the Fed increased the interest rates in December and issued a hawkish statement. I think that was the news. I think subsequent to that, the Fed’s views on what it was going to do in 2017 has been fairly consistent."

However, the central bank governor sees lack of clarity in policies from major economies and hardening of select internationally traded commodities to likely cause huge financial volatility and push up inflation.

"The lack of a consistent policy enunciation from major economies is the main source of volatility. Clearer policies, policies that take into account what in terms of the externalities that they create, if those are not put out in a consistent, well thought-out manner then that causes financial volatility and given how fast financial flows happen, it affects us very quickly, as indeed it affects other countries." said the RBI governor in an interview.

"In terms of the mandate of the RBI etc. the hardening of some of the internationally traded commodities is something that we need to be worried about because that would feed into inflation. So, there is a real side to it and there is a financial side to it. By the way, most analysts expect in 2017 the world to grow at a faster pace than 2016. So, that is the good news," said Patel.

Meanwhile, US markets have been scaling fresh highs in recent sessions on the back of Trump's policy announcements favouring the economy. Buoyed by rally in key US indices, Asian stocks, too, have inched to new 19-month highs on Thursday.

India's key benchmark index, the 30-share Sensex, kicked off today's session on a firm note, surging 425 points in early trade, mirroring the firm Asian and US markets.