The near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely, the FOMC stated, Amar Ambani said.
The US Federal Reserve on expected lines raised rates by 25 bps for the second time in the year 2017 on Wednesday and also announced its plans to cut down its holding of bonds and other securities.
The US Fed lifted its benchmark lending rate by a quarter percentage point to a target range of 1.00 percent to 1.25 percent and forecasting one more hike this year.
The US Fed also highlighted its plan to reduce its USD 4.2 trillion portfolios of Treasury bonds and mortgage-backed securities. The US central bank started with QE back in 2007 in the wake of financial crisis and to avoid recession.
The US market ended mixed while most of the Asian market plunged in red including Indian market. The Nifty slipped below its crucial support level of 9600 in opening trade.
The index is trading near key support levels and a slip below 9,550-9,500 could accelerate selling pressure on the index, suggest experts while a close above 9,650-9,700 would strengthen the bullish structure. But, any dips, should be used as buying opportunity.
We have collated views from various experts as to what does US Fed rate hike mean for India market and economy:
VK Sharma, Head - Private Client Group, HDFC Securities
The Federal Open Market Committee (FOMC), the policy-making arm of the U.S. Federal Reserve, hiked its rates on expected lines, by 0.25%. The FOMC also said that it will begin reducing its $ 4.5 trillion balance sheet this year. The details of the balance sheet contraction came through a separate release.
The US Fed statement is apparently hawkish, the SGX’s reaction may be too bearish that what is warranted. *While the FOMC has laid out a plan to reduce its balance sheet size, it has not told us when they would begin reducing the balance sheet.*
The bond markets tell you a different story. The yields on the 10 year have risen yesterday in the U.S. Thirdly Crude has fallen afresh. This should further help our markets. So, we feel the markets should recover after an initial fall as reality sets in.
Prasanth Prabhakaran, Sr. President and CEO, YES Securities (I) Ltd.
As expected FED raises rate by 25 bps to 1.25 percent and further Forecast 3 hikes in 2018. The markets have priced in at least 3 hikes this year. So, it can be said that this is in line with expectations.
Even if there is a knee-jerk reaction, we expect markets to recover quickly within the same/next few trading sessions.
Amar Ambani, HOR, IIFL Private Wealth
The Federal Reserve finally decided to effect an interest-rate increase and spoke of additional plans to shrink its USD 4.5 trillion balance sheet this year even as concerns grew over weak inflation.
The near-term risks to the economic outlook appear roughly balanced, but the committee is monitoring inflation developments closely, the FOMC stated. The Fed Chair Janet Yellen said the unwinding plan could be put into effect relatively soon if the economy evolves as the Fed anticipates.
Jimeet Modi, CEO, SAMCO SecuritiesIrrespective of the short term knee jerk reaction, there is no direct correlation between interest rates hikes and adverse stock market reactions. For e.g.. During Dow’s bull journey in 1994 to 1995 the interest rates were increased from 3.75 to 5.75 over a
period of 15 months – 18 months wherein still the Dow rose from 3500 to 5000 by December 1995. There are many instances wherein no such meaningful correlation is found.However when interest rate hikes reaches an extreme in the range of 5%-6%, that’s the time US markets have cranked substantially. Thus there is more room for interest rate hikes from the current 1% which may not impact the markets in the short term. But
if the US market succumbs to deep sell off, Indian market too will be adversely impacted.
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services :
The Fed rate hike by 25 bp to 1 to 1.25 percent was on expected lines. The tone of the policy, which everyone was keenly looking forward to, didn’t convey anything that was unexpected. Present indications are that one more 25 bp hike can be expected this year taking the total rate hikes to three, which indicates slow and shallow normalization. In brief, the Fed is sticking to its broad guidance of normalization over the next two years.Since the rate hike and the stance were on expected lines, this ‘non-event’ is likely to be inconsequential from the markets’ perspective. Wall Street ignored the rate hike with the Dow closing 0.2 percent higher and Nasdaq closing 0.4 percent lower. Indian
markets also are likely to be unaffected by this expected decision.
Market response to Fed hike is likely to be strong when the Fed tightens further in 2018. By then the Fed rate will be positive in real terms. Presently, it continues to be negative.
Vinod V Nair Head - Fundamental Research, Geojit Financial Services
There is some gap regarding to FED's future plan and market's outlook over US rate hike. FED plans to tighten the rate along with reduction in balance sheet reserve but market is considering that a hawkish view.
US market assumes some slowdown in the economy against a solid view of FED. This is unlikely to trigger any setback in the near-term but could impact over the medium to long-term as cost of funds and liquidity squeeze.
Gaurav Dua, Head of Research, SharekhanPost the initial nervousness, equity markets globally usually tend quickly adjust to changes and rebound back. Especially since it has not come as a surprise and the US Federal Reserve has given a clear roadmap of normalization of interest rates. Secondly, in the past interest rate cycles, it is seen that the flows to emerging markets only get affected in the initial phase of the US rate hike cycle (first couple of rate hikes) only.