What could be the impact on Indian markets if Fed hikes interest rates

There is a 96 per cent probability that the US Fed may hike rate by at least 25 bps as per the CNBC survey.

The question now is assuming the Fed does hike interest rates what could be the impact on the Indian markets.
For sure there will some pressure on fund flows and it is expected that there will be net outflows in both the asset classes i.e. equity markets and bond markets.

Basically the manner in which interest rate increase in US impacts the markets can be seen in two ways: One its impact on Economy and other its impact on stock prices.

No doubt that with US currency strengthening, the challenge for Indian economy magnifies as India remains a net importer owing to crude oil imports and Gold imports.

With trade deficit widening, Indian government may well face challenges in adopting an expansionary fiscal policy, which seems to be the need of the hour for the economy, post the demonetisation effect on the economy, which is widely touted to hamper the economic growth by one per cent.

With economy slowing down in the short run and consumer demand being directly hit by demonetisation, the stock prices can be expected to react negatively. If we consider a net outflow of funds adding to the woes, the stock prices may aggressively react assuming DIIs do not provide cushion to the equity markets.

The impact therefore would be negative for both the economy and the equity markets due to fed rate hike as the USD will strengthen and the trade balance may shift negatively for us.