WAITING FOR THE FED DECISION.......
By Ruma Dubey
Never ever has the US Federal Reserve held this kind of direct say over the Indian markets. Logically thinking, really, isn’t this entire “17th Sept” thing all hype and more psychological?
The stock market, the pure icon of capitalism is moved purely by sentiments – economics, fundamentals and all other things come much later. That is the underlying truth – markets are driven only by sentiments. And currently we do not have a single trigger; nothing really to look forward to which is why we have these dates – FOMC meet, RBI meet, WPI, IIP and et al.
This FOMC meet scheduled for midnight tomorrow is important, sure. It is after all about whether or not USA will hike interest rates. So let us assume that it does hike rates. At the most, it could be a 25 bps rate hike. Would that be so earth shattering that it could knock the bottom off the markets? Really?
And if it is about sentiments, doesn’t a rate hike mean good news – US economy is truly on the recovery path and is doing well? That is a much bigger and better news than the fact that rates were kept at same near zero levels.
Frankly, the markets have indeed discounted this rate hike; this news has been around for so long now, ever since June, we have been expecting a rate cut. Thus it would be best for the world, for India and all of us if the US Fed, once and for all, goes for a rate hike and ends this long going uncertainty.
The general fear is that if Fed hikes rate, FIIs will scoot from India. This fear is once again too farfetched. All those who wanted to quit are already out and those who wanted in, who have faith in India’s growth story are surely still around.
And look at it logically. Is our Indian economy so fragile that FIIs leaving will pull out the every foundation of our markets? Why this fear? During the global turmoil, when FIIs were indeed leaving, domestic institutions and LIC held steed. Do you know that collectively they both can hold the fort and LIC’s investment alone is equal to all FIIs put together? This time around, we have pension funds also coming in – they are already allowed to invest 15% and the Finance Minister wants to hike this contribution to 50%. Currently we have pension savings of the 60 million state employees and they all collectively contribute $13 billion of the $15 billion in assets overseen by the PFRDA. Imagine what happens when all these funds come into Indian equities?
So lets be very logical about this day tomorrow. The Fed needs to do what it see’s befitting its country and India, directly will not face a hit. As we keep on reiterating, the entire market runs on sentiments. If the moods turnaround, all this gloom will overnight turn into boom. And to change those sentiments, we need some stimulus, some policy announcement which will buoy the sentiments.