Various media reports these days have been giving diverse views on the US Fed's policy on interest rates. There is one group of experts which are of the view that there will be no hike in the rates over the next one year. This is led by the belief that inflation has slowed down, US dollar has been gaining ground and the US economy is not completely out of the woods yet. But there is the other view that the US economy is seemingly performing better and after the halt in the bond buying program, it is only inevitable that the US Fed will resort to hiking rates.
So what will the markets do when the Fed finally gets around to raising these rates? (Interestingly, this was also discussed by the Founder of Equitymaster, Mr Ajit Dayal in the recent Equitymaster conference - 'The tale of two Indias'.)
Since the financial crisis in 2008, the interest rates in the US have continued to remain extremely low; almost near zero. The investors have not seen rate hike since June 2006. The US Fed's rationale behind this move was that it would help revive the US economy.
The US Fed, for its part has been quite hazy about its intention to raise rates. However, should that happen, it could trigger a mass exodus of capital from emerging markets to the US. And India is not likely to be spared either. Indeed, when given an opportunity, global investors mostly prefer to keep their capital in their home countries.
Now, India has been a big beneficiary of the ultra-easy monetary policies of developed economies, especially the US. Stock prices across the board have risen even when corporate earnings growth has yet to keep pace. And thus the risk of capital flight could put the recent stock rally in reverse gear. And this could impact valuations across the board.
Thus, for investors it would be worthwhile to adopt bottoms up approach and invest in fundamentally strong companies since this group will be the least impacted when the market goes in a correction mode.