Equities, bonds gain even as Fed rate hike looms

Stocks rise in Europe and Asia; Oil edges off multi-year lows

The Indian financial market seemed to have taken a possible Fed rate hike in its stride, with all the asset classes – equities, bonds and currency – gaining on Tuesday. Experts reckon the market here has already discounted a 25 basis points hike by the Fed.

Indian equities rose for a second straight session on Tuesday, with the benchmark BSE Sensex ending higher by 170 points, or 0.68 per cent, to 25,320, while the 50-share NSE Nifty rising 50.8 points or 0.66 per cent at 7,700.9.

The yields on the 10-year bond closed at 7.788 per cent from 7.818 per cent, the rupee strengthened to 66.93 a dollar from its previous close of 67.10. The market expects the bond yields to hit 7.83 per cent and rupee to touch a maximum of 67.50 a dollar on Thursday, but both should correct back.

Reserve Bank of India Governor Raghuram Rajan said last week that the central bank was ready to face Fed-induced volatility. “Whatever decision the Fed takes, we are prepared for any eventuality,” Rajan said after RBI’s central board’s meeting in Kolkata on December 11.

A rate hike would remove significant uncertainties and would likely to be positive for the Indian currency, said Fitch’s arm India Ratings & Research on Monday. “The view here is that most of this phenomenon is due to expectations of a Fed rate hike and are not long lasting in nature. Just like how the QE (quantitative easing) tapering news was more potent than the actual tapering, markets will self-adjust once the rate hike is announced as this news gets factored in,” said Care Ratings in a report on Tuesday.

“Investors seem to have adopted a cautious stance ahead of the Federal Reserve meeting this week. A 25 basis point rate hike by the US Federal Reserve has largely been factored in by the markets. Investor focus has now shifted to the likely pace and quantum of further hikes once this first move is done,” said Shreyash Devalkar, fund manager – equities, BNP Paribas Mutual Fund.

The Fed had taken its target interest rate to zero in 2008 as the US slid into recession. The rate will finally be raised, believe analysts, at the end of the two-day meeting beginning Tuesday. Global crude oil prices rose on Tuesday after touching near 11-year lows. The global benchmark Brent crude has been sliding downward, as the Opec meeting on December 4 during which the oil-producing countries removed their production ceiling.

India’s foreign exchange reserve of $352.098 billion and the central bank’s resolve to intervene in the spot as well as in the currency futures markets should be adequate to iron out any volatility in the exchange rate, said N S Venkatesh, executive director and head of treasury of IDBI Bank Ltd.

“RBI has communicated its resolve to tackle any speculation and I don’t think anybody would want to take position against the central bank,” Venkatesh said. “On the event day, there would be some volatility, but soon the markets will bounce back. In fact, it may also turn out to be good for the country as money will start flowing from the fragile emerging markets to India as the developed economies are only showing green shoots and no real signs of growth,” Venkatesh said.

The global risk-off sentiment has spurred foreign investors to pull out money from the Indian market. On Tuesday, foreign institutional investors (FIIs) bought shares worth Rs 48 crore, while domestic institutional investors bought shares worth Rs 273 crore, provisional data showed.

In December, they have sold shares worth more than Rs 3,300 crore, paring year to date purchases to about Rs 14,800 crore.

A HISTORY OF FED LEADERS & RATES
A look at how the previous 3 US Fed chiefs left their mark:

PAUL VOLCKER

• Tenure: Aug 6, 1979  to Aug 11, 1987
   
• October 1979: Raises benchmark rate by 4 percentage points in a single month to 15.5%. Tightens policy to push rates to 20% next year
   
• August 1982: Fed eases off monetary brakes, allowing interest rates to fall
   
• June 1983: Inflation falls to 2.5%, after peaking at 14.6% just 3 years earlier

ALAN GREENSPAN

• Tenure: Aug 11, 1987 to Jan 31, 2006
   
• July 1988: Inflation rises above 5% after Greenspan increases interest rates sharply, pushing the economy into recession in early 1990s
   
• July 1996: In the mid-1990s, he resists pressure to raise interest rates as unemployment declines
   
• June 2003: Struggling to revive the economy after a brief recession, Fed cuts its benchmark rate to 1%

BEN BERNANKE

• Tenure: Feb 1, 2006 to Jan 31, 2014
   
• June 2006: The Fed, after raising interest rates at 17 consecutive meetings, ends campaign to slow the economy and forestall inflation
   
• December 2008: Starting in 2007, Fed reduces interest rates as economic growth collapses. After the demise of Lehman Bros, Bernanke enters uncharted territory, pushing interest rates nearly to zero

Source: NYT