US Fed rate hikes 0.25% interest rate: Impact on Indian markets

New Delhi: Indian stock markets ended lower on Wednesday on a cautionary note that US Federal Reserve will hike interest rates in it Federal Open Market Committee (FOMC) — the policy-setting body of the Federal Reserve System meeting on Thursday.

The US Federal Reserve on Thursday raised the benchmark interest rate by a quarter percentage point as expected, citing an improving economy with one month to go before President-elect Donald Trump takes office.

The policy-setting Federal Open Market Committee voted unanimously to increase the key federal funds rate to a range of 0.5 to 0.75 percent, but repeated that the world`s biggest economy likely will require only "gradual" rate increases going forward. 

The Nifty, on Thursday, ended down 0.48 percent at 8,182.45, while the Sensex closed down 0.36 percent at 26,602.84.

Now that the Fed has hiked the rate by 0.25 basis points on December 14 in FOMC meeting on December 14, experts say that the rate hike in the US and its upwards trajectory does not spell good news for the Indian bond and equity market. 

In their quarterly economic projections, Fed officials anticipate three increases in 2017, putting the rate at 1.4 percent at the end of the year. It would then rise at the close of 2018 to 2.1 percent. 

Of the 17 officials making predictions, 11 see rates of 1.375 percent or higher next year.

FIIs who were viewing emerging markets like India as an investment destination due to comparatively higher interest rates than the US in the coming days, are seen lowering their exposure in Indian markets.

If the hike in interest rate is maintained periodically, as hinted by the Fed Reserve, FIIS outflow may gather pace, as higher interest rate in the US will be anytime more lucrative than India or any other emerging market.

The rupee is also seen depreciating, leading to the possibilities of higher current account deficit and higher inflation.

The rate hike in the US is also expected to up the borrowing cost of businesses in India, thereby reducing the risk-adjusted returns of Indian firms borrowing from abroad.

With agencies input