How Fed hikes affected Indian Markets?

The fight against inflation being waged by the US Federal Reserve has now become fierce. The US central bank raised interest rates by 75 basis points for the third time in a row.

Given that US inflation is still on the rise, the Fed's hawkish stance was widely anticipated. Jerome Powell, the chairman of the Federal Reserve, stressed in his remarks that in order to fight inflation, interest rates will probably continue to rise in the near future. As things stand, there is a good chance that the FOMC will raise interest rates by another 75 basis points in November.

That effectively eliminates the possibility of a pause for the time being. Naturally, the implications of the Fed's strategy of battling inflation at all costs have jolted investors out of their stagnation.

The Fed is prepared to plunge this economy into a recession and is not taking any chances with inflation.

In an effort to catch up with the Fed, other central banks are anticipated to do the same with more upfront increases. Rising interest rates result in a stronger US dollar, which makes equity assets and emerging markets less appealing investments for international investors.

The risk of an economic downturn is increased by monetary policy tightening that is occurring quickly. A global recession is now more imminent than ever, which is bad news for equity markets. A lot of tightening has already occurred and may still be occurring because this has been the fastest rate hike cycle in decades.

High volatility is a common feature of Fed tightening cycles, particularly in riskier market segments. Volatility is probably going to remain high because of how quickly the Fed is acting.

There is a lot on the investor's plate. While they mull over the effects of aggressive interest rate increases, geopolitical risks persist. Clear recession risks are indicated by the China slowdown story, the possibility of energy rationing in Europe, the strong dollar, and the shaky domestic equity and housing markets.

How Fed hikes affected Indian Markets?

After the FOMC meeting, the Indian stock market remained largely resilient. On Thursday, the Nifty 50 fell by 0.50%, and some Asian markets fell even more.

India performs better than developed markets in some important areas, such as growth and inflation. However, decoupling cannot entirely account for India's relative strength because other emerging markets are currently less investable, which also plays a significant role.

Indian markets will keep trading at a premium to their counterparts in other emerging markets. India is not entirely safe from the risks associated with the global macroeconomic environment. Foreign institutional investor outflows from India may resume as the dollar gains strength, valuations stay high, and emerging markets become easier to invest in.

The Indian rupee's value against the dollar dropped to a record low of 80.87. Although the RBI's dollar reserves are shrinking and capital is moving away from the rupee to dollar assets, the sustained strength of the dollar is increasing pressure on it to defend the currency.

Rising US interest rates increase the allure of dollar assets and raise the possibility of capital flight from emerging markets like India.

The Fed's hawkish stance will probably put more pressure on the RBI to keep up its aggressive rate hike strategy in order to relieve the rupee's pressure.

In light of China's and the eurozone's precipitous slowdowns, the market believes the likelihood of a US recession has increased to 75%, which is bad news for global growth.

Slowing portfolio flows have made the rupee-dollar exchange rate decline more apparent, even though falling crude oil prices are limiting losses.

As a stronger dollar prompts capital outflows, the RBI may aggressively raise interest rates, maintaining the turbulence of the markets.

Indian markets will appear unattractive from a dollar return perspective if the rupee starts to depreciate. In the near to mid-term, there is also a chance that foreign investment flows will reverse, which would raise volatility.

Additionally, major central banks, including India, will be forced to raise interest rates in order to relieve pressure on their home currencies as a result of higher interest rates in the US.

Indian markets have outperformed their peers thanks in part to robust growth expectations, better inflation control, and rupee performance relative to emerging markets.

On the plus side, the Indian economy and inflation benefited from Brent trading below $90 per barrel. Softer crude prices are the only thing keeping the domestic markets from collapsing.

Currently, there is a 2% difference between the 10-year G-Sec and the next 12-month Nifty earnings yield, favoring bonds over equities. This could increase to 2.3-2.4% if India's inclusion in the Emerging Markets Bond Index is not achieved.

Investors should use volatility in the upcoming weeks in a phased manner to build a position with a view of 12 to 18 months in high-quality companies where earnings visibility is very high. The current setup is a "buy on dips" market. Domestic-focused topics like banks, consumer goods, healthcare, domestic industrials, and discretionary consumption are better suited for this situation than export- and cyclically-focused themes.

Fears of a recession could keep pressure on globally integrated industries like information technology, metals, and pharmaceuticals for some time. On the other hand, industries that rely on consumption and raw materials, like FMCG, paints, tyres, and automobiles, will probably gain from robust domestic demand and a drop in commodity prices.

In conclusion, India currently has more macroeconomic advantages than disadvantages. But given the current state of the world economy, it is unclear whether India's high valuations are justified.