Monday, September 28, 2015

Is A Rate Hike Diabolical?

Reams have been written before today regarding the consequences of an increase in interest rate by the Fed.Although that has been kept in abeyance with the global situation, refugee crisis, China currency devaluation all playing their part, the tone of the meeting suggests a hike in rates in the USA sooner rather than later.

It may be as early as October 2015 or may be spread over November and December which begets the question,is an increase in rates actually such a disaster for emerging markets?

Well,for those with shaky currencies or too tight controls and dipping growth,read China,it may very much encourage a flight of capital.

Which brings us to India.The USDINR holding the 66-67 level gives a sense of stability amidst all the turmoil witnessed recently.The fall in crude is another huge positive.If the monsoon gives aparting kick to the central Indian plains then we can safely assume that rate hike or not the domestic consumption engine will pick up.

Secondly,does a move of 25bps and a rate of .5% tempt FIIs in a big enough manner that they stampede back to invest in US assets?

In fact an increase in rates by the Fed might prove providential for India.

(a)Asset prices in India which have gone up higher than fundamental levels will correct and begin a virtous  cycle that will encourage new buyers

(b)Monetary authorities have elbow room to maneuver in case of a new crisis,when rates near zero then there are not many tools for the Government policy to work

(c)A higher interest rate prompts internal savings,although consumption is necessary to kickstart growth,savings is an important part of National capital availability

Yes there will be a correction in stock markets in emerging countries including ours when rates rise but is that necessarily such a bad thing.The prices aligning with quarterly profits will see value emerge in the better managed companies.