4 areas where India will see a direct hit from Fed liftoff

The US Federal Reserve is likely to increase rates for the first time since 2006 when it meets on December 15-16. Bloomberg calculations estimate the probability of a hike at 78 per cent now from 37 per cent in September 2015. The debate has now shifted from ‘is this the right move?’ to ‘how high?’ A rate hike will increase volatility in Indian market and lead to higher repayment costs (both principal and interest) for Indian companies with foreign currency loans.

An ET Intelligence Group study of past increases shows Indian equities have fared better three months after the hike compared with bond markets. But the problem now is that the foreign loan burden of India Inc is higher than at any time in the past and that could dampen any post-Fed increase rally.

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Fed impact on Indian stocks

► Indian equities outperformed emerging markets three months after the increase in past three Fed cycles
► Indian equities posted average dollar return of 12.57% over EMs on these three occasions
► Indian equities' return during entire Fed cycle (bottom to peak rates) is 11.6%, which is among the highest in top markets

Impact on Indian debt flow

► Debt more vulnerable compared with equities as currency and interest differential both matter to investors
► Investors pulled out $13 billion in 2013 when Fed announced plans to cut bond purchases
► FIIs have invested $32 billion in Indian debt since early 2014. Some of it may be pulled out

Impact on global fund flows

► Investors are likely to shift cash around in large volume in anticipation of a hike
► ‘Global rotation' among asset classes has already started
► Investors are moving money out of assets susceptible to rate hikes, such as emerging market securities, gold and govt bonds

Impact on India Inc

► Higher cost of borrowing on dollar loans will impact margins
► India Inc dominates with 80 per cent share of foreign borrowing
► Foreign debt rose to $182 billion in March 2015 from $57 billion in 2007
► Proportion of dollar-denominated foreign currency loans has risen to 59% from 4%