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US Fed hikes rate: Indian equities may decline in knee-jerk move, pressure on rupee likely

The US Federal Reserve raised interest rates by a quarter point on Wednesday and signalled a faster pace of increases in 2017 as the Donald Trump administration takes over with promises to boost growth through tax cuts, spending and deregulation.

The rate increase, regarded as a virtual certainty by financial markets in the wake of a string of generally strong economic reports, raised the target federal funds rate 25 basis points to between 0.50 percent and 0.75 percent.

Here's how the Indian marekts will be impacted:

 US Fed hikes rate: Indian equities may decline in knee-jerk move, pressure on rupee likely

Reuters

The Indian markets are likely to decline in reaction to the Fed's move as traders become cautious. However, most of the analysts do not expect a sharp decline in the markets as the rate hike was in the expected lines.

"The US Fed's decision was more or less on the expected lines. Although Indian markets may see some knee-jerk reaction initially, it would recover soon," said says G Chokkalingam, founder and MD, Equinomics Research and Advisory.

According to him, Fed's policy decisions have revolved around the health of the global economy ever since last year's Fed hike. "Few days back we saw global crude prices rallying sharply, impacting to some extent our markets as well, but again oil prices are slipping back because of the fragile global economy. Hence our markets may not see any deep correction and things will be back to normal," he said.

Usually, a hike in US interest rates prompts the FIIs to pull of emermging markets like India and to invest back in the US. This is because a rate hike means the US economy is stronger and so safer for investments. Such a pullout will also put pressure on the rupee, which is already on a weak footing against the dollar.

However, there are concerns over the US central bank's hawkish stance, signalling faster rate increases.

Asian shares and currencies struggled on Thursday after the Federal Reserve raised rates for the first time in a year and hinted at the risk of a faster pace of tightening than investors were positioned for.

Yields on short-term US debt surged to the highest since 2009, sending the dollar to peaks not seen in almost 14 years.

Wall Street suffered its biggest percentage decline since before the 8 November U.S. presidential election, though the loss was slight compared with gains of the last month or so.

"I think that basically interest rate movements or marking movements are forward future oriented and so this quarter point increase, 25 basis points was well anticipated," Seth Freeman (more) CEO, EM Capital Management, told CNBC-TV18 in an interview.

"However, I do think the question whether it could be three increases may make the investors a little more cautious about emerging markets in general. In India where there is continuous pressure to reduce interest rates and that could have some terms of INR-USD that could put some pressure on the rupee," he said.

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Updated Date: Dec 15, 2016 09:13:50 IST