Fed rate hike: Likely impact on India, and what investors should do

Economists, who had been expecting an additional rate hike of 75-100 basis points over the next three quarters in India, now say the RBI could go for additional rate hike of up to 125 basis points this fiscal, taking the overall rate hike to over 200 basis points.

That may not only impact overall demand in the economy and GDP growth, but will also lead to a correction in the market on account of outflow of funds by foreign portfolio investors and downward revision in earning projections of listed entities as a result of higher cost of funds and input cost.

The day after the Fed announced its rate hike by 75 basis points, the Sensex had fallen 2% to close at an over 12-month low of 51,495. According to provisional data released by exchanges, FPIs sold equity holdings worth Rs 3,257 crore on Thursday, and in June they have sold holdings worth Rs 31,500 crore putting pressure on domestic equities. Domestic institutional investors have invested a net of Rs 24,225 crore in the same period.

What should investors do?

A large part of the inflation concerns is on account of the Russia-Ukraine war. If an early resolution of the conflict may revive market sentiments, there is a feeling that a prolonged war could only hurt these further as it could lead to spike in oil prices and food items.

Given the continuing rise in interest rates and uncertainty on where the yields may stabilise, while debt investors can go for short-term products of 1-2 years, market participants feel equity markets in current times should only be considered with an investment horizon of at least 3 years.

Market participants tracking economic activity say India is very well positioned for higher growth over the next three to five years and companies across sectors are already in the process of fresh capital investment, which is expected to gain momentum over the coming months. Although the decline in equity markets has weakened investor sentiment for now, equity investments should be done keeping the future in mind. Systematic investment plans should be the preferred mode, as these will help investors capitalise on any further dip in the market. Also, to beat inflation, investors need to go with equities, which have traditionally performed better when inflation is high.

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For a large number of investors who entered the markets over the last couple of years as day traders, it is high time they stopped taking speculative positions. Many feel the market uncertainty is way too high for such investors who are looking to make money on a daily basis, and who may only end up losing.