Fed up waiting!

Even if the Fed hikes rates for the first time in more than nine years, it may not be the end of the world, especially for investors with a time horizon longer than a few days

So Janet Yellen decided to hold off on pulling the trigger in September. The Central Bank’s grande dame held fire on the first rates rise in more than nine years as she admitted “uncertainties abroad” had made it more risky to tighten policy. Just before her press conference, however, the betting was about one in three that the hike will come on Thursday (September 17), two in three that it will be in October and three in three that it will be by the end of the year. This is called “tightening of monetary policy.” It’s also referred to as “the removal of stimulus.” The Fed Reserve wants to throttle back on cheap money since the economy there is growing smartly and too much stimulus could lead to explosive consequences.

The contrast between them and us, however, is stark. While the Reserve Bank of India is not dropping its key rate though Governor Raghuram Rajan is under tremendous pressure both from India Inc and the Government - Neeti Aayog chief says we can cut 1% - lot of people think another chop is inevitable. Nevertheless, we anticipate that the RBI will be forced to cut rates for a fourth time soon. That would be a big deal – a rate cut in India happening just as the US moves rates higher for the first time in a decade. You can just imagine where that would leave the loonie. But it’s really a moot point. It hasn’t happened in September, but it could be next month. Have no doubt. It’s coming. Pulling the trigger will be the US central bank, known as the Fed. It’s been waiting for months for the right moment when the economy is strong enough to withstand money getting a little more expensive. This may be it. Now, most importantly, how can you benefit? This first rate hike will be one of many (the Fed usually increases about a dozen times during a tightening cycle). The Fed, America's central bank, last raised rates in June of 2006, by 25 basis points to 5.25%. It soon found itself reversing course, as a housing bust gave way to the Great Recession; since December of 2008, the Fed's benchmark interest rate has been set at between 0.0% and 0.25%. But here’s the question: What effect will an interest rate hike have on Indian housing market? Housing, after all, was one of the hardest-hit areas of the economy following the financial collapse in 2007. This is why some real estate experts have been sounding the alarm about an interest rate hike: The conventional wisdom holds that the housing market suffers when rates rise, causing affordability to drop. But the truth is that our real estate regulations do not allow foreign investors to invest directly in realty, thus insulating this segment from the Fed monetary tightening. No doubt foreign investors are investing in real estate, start-ups and unlisted companies through private equity and venture capital funds. But these are long-term investors who are unlikely to churn their assets or face redemption pressure following a US interest rate hike. So the markets may not be impacted much. If, however, the hike comes earlier, or if the quantum of hike is more than expected, markets may react sharply. Funds may flow out of both debt and equity markets, and put under pressure the rupee, which over the last couple of weeks has inched towards 63 against the dollar. But it’s also true that we have plentiful forex reserves, a very modest current account deficit and falling inflation and fiscal deficit. It is well positioned to adjust to the slowdown in China and the end of the dollar bonanza. So why get scared?