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Fed storm passes, but St worried

Sensex drops 84 points but rupee slides 39 paise; market mavens see higher quantum of rate hikes negatively affecting the markets ahead

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As the US rate hike typhoon passed by, India has stood like a solid rock.

Amid the fears of volatility and uncertainty in capital flows into emerging market economies, the reality of interest rate has just sunk in.

While hiking the rate by 25 basis points, the US Federal Reserve has also given a roadmap for 2017 and 2018, where it has talked about four rate hikes. A stronger dollar and growing economy in 2017 will greet the Donald Trump administration, which rides on the expectations of tax cuts and higher spending.

Despite the fact that the rate hike was mostly discounted, a sense of disquiet gripped Indian stock markets in the morning, though the 30-stock Sensex regained a part of early losses and closed at 26519, down 84 points. The NSE Nifty fell 28.85 points, or 0.35%, at 8,153.60.

On Thursday, The Indian rupee fell against the US dollar, closed at 67.84 per US dollar, down 0.57%, or 39 paise.

Arvind Subramanian, chief economic advisor, believes that India is very well cushioned to absorb the impact. On Thursday, he said the 0.25% rate hike was on expected lines and India with strong macro-economic fundamentals is "less anxious" than other markets.

The economic affairs secretary Shaktikanta Das said the rate hike has ended the uncertainty which has been there over the last one year or so. "Earlier the US Fed had said in 2016 that there would be four rate hikes and there was speculation and expectations that there will be a rate hike and did not happen," he said.

According to Das, the markets in India had already factored in a possible rate hike of 25 basis points. "Therefore I would expect our currency and other markets to stabilise after some initial repulse or volatility but that has also not been visible so far and whatever movement is taking in the stock or currency markets is nothing unusual. Our market had already factored in that rate hike," he said.

Vaibhav Agrawal, head of research, Angel Broking, says the rate hike after a gap of a year indicates a strong US economy. "This indeed is good news for the global economy. However, a higher quantum of increase in US interest rates will be seen negatively in the near term by the markets. We believe that the domestic markets may remain volatile for some time with expectations of rising US interest rates as well as high uncertainty of the impact of demonetization."

According to him, Fed's signal to raise rates by three times next year is faster than market expectations. "This is likely to increase US interest rates faster, which will strengthen the US dollar putting pressure on the rupee."

Kamlesh Rao, CEO, Kotak Securities, believes that the Fed hike would not impact the Indian currency market as this hike was already expected. Post Fed hike, the holiday season would ensure that activity remains thin. This, in turn, will ensure that USD-INR stays range bound, between 67.20 and 67.80 levels on spot.

"For riskier assets like emerging markets, including India, a hawkish stance or a higher-than-expected rate hike will be negative as fund outflows may increase. It will lead to further depreciation of rupee, but will be good for export-oriented companies like IT and pharma. A dovish tone will have a positive outlook and will benefit the import-dependent sectors and sectors using oil derivatives including others like OMCs, Paints, etc. On one hand, a strong US economy is beneficial for emerging economies like India, but on the other hand, the protectionist measures in the services sector can also hurt India," says Rao.

Rana Kapoor, MD & CEO, YES Bank, said the US Fed plan would create some near-term volatility in global markets. "But I am confident that India's superior macro underpinnings will turn it into an outperformer."

According to him, the rate hike has raised confidence in the US economic recovery.

Soumya Kanti Ghosh, chief economic adviser at SBI, said that by hiking rate, the Fed recognised the considerable progress the economy has made towards the dual objectives of maximum employment and price stability.

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