Why high US rates are bad and good for Indian equities

Pramod Gubbi, CFA - Founder - Marcellus Investment Managers

Sensex fell over 1,000 points amid global sell-off on December 19 due to a key risk emerging for Indian markets stemming from elevated interest rates in the US. Will this put further pressure on foreign flows and impact stock prices in India adversely? Pramod Gubbi of Marcellus Investment Managers shares his take:

What’s your reading of the rate cut scene in the US?

Yesterday’s interest rate cut by Fed was in line with expectations. The latest GDP data shows the American economy is in good shape, and inflation isn’t falling sharply. There’s no compelling reason for the Fed to cut rates unless there’s an exception. The expectation of sharp cuts from a couple of months ago has definitely moderated.

If US rates stay elevated, how will that impact India?

If US rates remain elevated whereas in India GDP numbers remain weak, it could trigger a sharper rate cut cycle here. This would likely mean more rupee depreciation. But RBI will closely watch Fed actions while balancing international capital flows, exchange rates, local growth, and inflation.

How do you see FII flows in such a scenario? And how will this impact markets?

If the differential in interest rates between the US and India widens more than anticipated, some FII outflow is inevitable. The October-December period saw one of the largest FII outflows in India’s history for a single quarter. Despite this, the INR hasn’t depreciated significantly, largely due to RBI’s intervention. But we expect FII selling to ease in the coming months, because if valuations are attractive, long-term capital inflows could offset this outflow.

Besides, over the past four years, domestic investors have driven market growth, largely independent of FIIs. With SIPs reaching Rs 25,000 crore a month and overall inflows around Rs 50,000 crore, domestic confidence is strong. While sharp FII outflows, like $10-billion outflow in October, can create short-term corrections, domestic retail money—both direct and through mutual funds—remains the market’s primary driver.