Can India really withstand a Fed hike unperturbed?

As for equities, FPIs have pulled out nearly $1 billion since the beginning of the month due to lackluster quarterly earnings and concerns over a possible Fed rate hike.

Street-smart market analysts and experts who sound confident that the Indian stock market has grown resilient to the talk of a Fed rate hike, which they feel would pass off at the most as a non-event, need to sit up and take note of the fact that the overseas portfolio investors have not only been offloading stocks on BSE and NSE but are also rapidly getting out of Indian debt securities too. The Sensex and Nifty have often been at the receiving end as news of a Fed hike becomes imminent. 

Foreign portfolio investors sold a net of Rs.2,565 crore worth of debt securities in November so far compared with a Rs. 15,701 crore net investment in October, data from NSDL showed. And market watchers say this outflow is expected to only increase over the next few weeks in the runup up to the rate-setting meeting of the US central bank scheduled for December 15-16.

As for equities, FPIs have pulled out nearly US $1 billion since the beginning of the month due to lacklustre quarterly earnings and concerns over a possible Fed rate hike. The selloff came after FPI inflow to the capital markets had hit a seven-month high in October. 

Net outflow from equities between November 2 and 19 stood at Rs. 5,713 crore, while it was Rs. 2,565 crore from debt, translating into a total of Rs 8,278 crore ($1.3 billion). In October, FPIs had made a net investment of Rs. 22,350 crore, making it their highest investment since March, when they had poured in Rs. 20,723 crore into the Indian markets.

Dalal Street watchers had maintained so far that the domestic market was well-prepared for the much-awaited Fed liftoff, taking comfort in the fact that while FPIs have been cagey about Indian equities for some time now, they have actually gone whole hog on domestic debt.
Plus, India’s increasingly improving macro-economic variables give them confidence that in a likely rout in emerging markets, the domestic market will still stand out as a shining spot for yield-chasing FPIs. There was a strong surge in FPI investments in India’s debt securities since the beginning of CY2015 despite the expectation of a Fed rate hike, and FPIs had exhausted all the debt limits even after the Reserve Bank of India raised it twice during the year.

On the equity side, the Indian market has been a major underperformer among the emerging markets this year, thanks mainly to disappointment on earnings, slow pace of reforms and the impending Fed rate hike.

A Fed rate hike is expected to set off an FPI outflow from emerging economies as investors are likely to flock to US assets in search of safer, better returns leading to less capital inflows to the emerging markets.

Participants of the Indian market also feel confident about the fact that the inflow of domestic savings into the equity market has been very strong, and growing, this year, which they feel should give the domestic institutional investors enough clout to step in when FPIs move out.
Moreover, the Reserve Bank of India has over the past two years managed to create a large forex reserve to check any volatility in the rupee as a result of FPI outflow, if any, which again should hold India in good stead.

India’s foreign exchange reserves fell by $1.980 billion to $351.547 billion in the week to October 23, as the central bank has been intervening regularly in the market to stem volatility in the domestic currency.