Aug 23, 2000|
The Fed and the Indian stock markets
The bulls are back and the markets are on a roll. With the US Fed having decided to leave rates unchanged, the bulls will get yet another shot in the arm. But, in the first place, how do US interest rates affect domestic stock markets?
By opening up its shores for international trade and investment, India's integration into the world economy was but an eventuality. The US factor comes in as the US Dollar is the only truly international currency. Most of our trade and capital flows are denominated in US Dollars and therefore a keen interest in the currency and the determinants of its value (interest rates among other factors). Another factor that leads us to track US interest rates is the fact that US stock markets set the benchmark for valuation of technology stocks.
Let's first look at the factors that affect the stock markets directly. The US economy has been on a roll over the last decade largely due to a revolution in technological developments. The stock markets as a result of the unprecedented growth have been booming. The Fed, in order to curb the excesses in the economy, which have already given rise to inflationary pressures, has raised rates on five occasions in recent months. Persistently rising interest rates do affect stock market valuations and as the US is serving as the benchmark, any downward revision in valuations is bound to reflect in domestic markets. Further to this losses in stock markets could trigger redemption pressures on foreign funds, a number of which have an exposure to domestic (Indian) markets.
Higher interest rates in the US also imply that US investors would demand a higher return (as opportunity cost is higher). This could lead to a slowdown in fresh inflows into the Indian markets, as more funds would be retained in the relatively higher yielding US markets.
The other impact that US interest rates have is on the value of the domestic currency (which in recent weeks has been very volatile). Rising US rates would imply a stronger US Dollar (i.e. a depreciation in the value of the Rupee). This would adversely affect companies/government with unhedged foreign currency exposure. It would also correspond to a higher cost of imports. However, a modest depreciation in the value of the currency is not considered to be a negative as there are benefits in terms of an enhanced competitiveness in the export markets. The fallout of such an appreciation/depreciation in the value of the Rupee will impact the stock markets as it affects both the profitability of the companies and the flow of funds.
The Fed's decision to leave rates unchanged is a blessing for the short rally that we have witnessed in the domestic markets. Nevertheless the continuity of the rally would also depend on several other factors. Two factors, as mentioned in our article have the potential to derail the rally - the tension in Kashmir and a potential hike in diesel prices.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407