Domestic markets to remain firm to spillovers from US cues

Mumbai: Domestic equity markets have witnessed a strong pullback rally post-Fed rate hike. Also, the opportunity cost of deploying money in markets will go up.

With the objective of bringing down CPI inflation to about 2 per cent, the US Federal Reserve has been tightening rates and reducing liquidity. The hike of 75 bps was as per market expectations and hence was greeted by a short covering rally in the US markets.

Talking to Bizz Buzz, Sandeep Bagla, CEO - Trust Mutual Funds, said: "In India, equity markets which have been gradually seeing lower levels over the last few months are witnessing a strong pull back rally today. However, the increase in US rates and tightening of global liquidity in the form of Quantitative Tightening will lead to dampening of demand, which should lead to lower growth and profitability for the corporate world." Also, the opportunity cost of deploying money in markets will go up. Slower growth prospects, lower profitability, and higher discounting rates generally lead to lower stock markets. Over the next few months, as global central banks hike rates, even if as per market expectations do not augur well for risky asset classes like equities, he said.

The rate hike by the US Federal Reserve is as expected. The quantum will not be replicated in India since the US and Indian economies are very differently positioned. The Federal Reserve was well behind the curve and is trying to catch up and subdue inflation which threatens to become systemic.

Rajiv Shastri, Director, and CEO-NJ AMC, says: "In India, the RBI has stayed ahead and as a result, we don't see policy rates in India increasing as much as in the US. As such, the impact on the Indian equity markets will be limited to the spillover from the US markets with domestic conditions remaining neutral at the moment."

Investors need not respond to this as these are transitory conditions and will resolve themselves in time. The Indian economy is poised for a long period of growth and acting on such transitory impulses may deprive investors of the long-term benefits that are expected to accrue, he added.