Can the US Fed Move Trigger a Rate Hike in India?

Hello friends. As I record this video on Thursday afternoon, the US Federal Reserve has hiked 75 basis points, or 0.75% interest rates for a second time in a row.

Now the US markets saw a smart jump on Wednesday and the markets cheered the rate hike because the US Federal Reserve chairman said from now on, he will wait for the inflation data and if it all it is justified, further rate hikes, whether aggressive or toned down, would be implemented.

The markets, of course, cheered it thinking that the period of very sharp rate hikes could be drawing to an end and the fact that the chairman also denied the possibility of a recession already setting into the US markets sent the markets higher.

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Of course, of the Indian markets, as I record this video, are still trading and we have seen more than 200 point rally on the Nifty. So our domestic markets are cheering the move as well.

Today, being the expiry, there is also the consideration of short covering, but going further, between the 3rd and 5th of August 2022, the RBI's own monetary policy committee or MPC will be meeting to consider interest rate decision in India.

As an Indian as a domestic trader, that outcome means a lot to me as compared to what the Fed has done. But does it mean that we ignore the fallout of the Fed rate hike?

Not at all. Do remember that the global financial markets are now one big, gigantic village where people are buying and selling from and to each other. Thanks to the information technology age, you don't need to physically go anywhere to buy stocks etcetera and arbitraging has therefore become the norm.

As I have explained to you in my past videos there is something called interest rate arbitrage or cash carry trade. So if country A is offering 10% interest rate and country B is offering only 5% interest rate, money tends to flow out of country B yielding 5% and going to country A, which is giving 10%.

Now, if you want to adjust for inflation our inflation is higher than the US. Therefore, in my humble opinion, I would conjecture that the Fed hiking rates, by 0.75% is likely to push our very own RBI's monetary policy committee to raise our interest rates also. Of course, like I said, at this point in time, we can only conjecture.

Does this have any implication for you as an investor/trader? In my opinion, yes.

When interest rates rise, one of the things that options premium are determined by is by the risk free rate. So should be RBI hike the repo rate, you will automatically see options premiums rising a little bit. May not be from the very next day itself, with a slight time lag, maybe in the next expiry, but that's likely to happen.

So that is big news for options traders and for futures traders, the possibility of the premium on futures or the basis, rising higher becomes that much more elevated. Of course, this is all other things remaining constant. If there is short interest building up, then the basis can even go into inversion or discount to cash. But everything said and done in the F&O space, this is the immediate fallout.

What about a broader market strategy? I have made ample videos in the past telling you that as the cost of money or coupon rates, interest rates, repo rates, call them what you will, are going to rise over a period of time, interest rate sensitive stocks will definitely see a change in sentiments.

To not extend any sector, any company, that is very heavily dependent on EMI-based sales, or say, for example, NBFCs is for whom money is both a raw material, which they borrow from the public, and finished products, which they lead to their borrowers, will start feeling a disruption in their business models.

Now any company that can pass on the rising input cost of money to its consumer should be doing pretty well. But if at all the business is very competitive, which nowadays it is, some amount of discounting of interest rate sensitive stocks would be in order.

So we traders are brain warriors. We fight and win in the market with our ideas. And nothing happens in these financial markets without a reason. And the reason is invariably financial.

So our money being the chess pieces and the market being a chess board, it is our job to keep shuffling the chess pieces across the board, taking it out of sectors when the returns are less than optimal or relatively less, and placing that money into sectors where the return is relatively higher.

Yesterday, I recorded a video telling you why I feel the FMCG sector might be a good place to hide. So, given a choice between interest rate sensitive sectors and the FMCG sector, I would say raise your allocation to the FMCG space as compared to the interest rate sensitives. That seems to be a common sense, sound move to make.

On this optimistic note, I bid goodbye to you not before reminding you to click like on this video if you liked what you saw.

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Thank you for your patience and being with me in this video. Till we meet again in my next, this is Vijay Bhambwani signing off for now. I wish you have a very, very profitable day ahead. Thank you. Bye.