The Impact of High US Interest Rate on Indian Stock Market

Summary

A jump in interest rate in US making Indian Markets less viable for foreign investors who faces risk of INR depreciation also on Indian equities. This is why they are selling. Let's have a look at

Indian markets have outperformed global markets so far this year, with large-cap indices rising by 12-17% and small and mid-cap sectors seeing even higher growth. During this period, the world index has increased by just 3%, emerging markets have experienced a 3% decline, and the S&P has risen by 6%.

The primary concern among investors in India is the potential impact of a global economic slowdown driven by rising interest rates worldwide. When risk-free rates increase globally, the cost of equity rises, which can lead to a reduction in earnings multiples (P/E) in the global markets.

Market expectations also play a crucial role in this scenario. Elevated long-term interest rates can exert pressure on both global economic growth and market valuations.

Despite US 10-year rates reaching over 4.8%, the highest in over a decade, and mortgage and student loan rates tripling in the past two years, US GDP growth for 2023 remains strong at 2.1%. This robust performance is attributed to significant fiscal spending, amounting to nearly 6% of the GDP. However, the substantial US debt, which is now 3.22 times its GDP (including household debt), is a growing concern. If the US government tightens its fiscal policy, it could result in a GDP growth slowdown in 2024.

In contrast, India is believed to deviate from this trend due to several factors. The country sustains robust economic growth at 6-7% annually, more than twice the global rate. India has lower dependence on foreign debt for its growth, and its corporate profitability is expected to grow by over 15% CAGR in the next three years. Recent economic data, including lower CPI, strong GST collection, high IIP growth, and expansionary PMIs, support the notion of a thriving Indian economy.

However, potential consequences of a global economic slowdown on India include a slowdown in exports, the strengthening of the US dollar or a rise in Indian interest rates to maintain balance, and fluctuating crude oil prices. India's exports may be affected by reduced global demand, especially in the manufacturing sector. India's strong economic growth may lead to higher imports. Additionally, the narrowing gap between Indian and US 10-year interest rates could strengthen the US dollar or prompt the RBI to raise domestic interest rates. Geopolitical risks and underinvestment in oil could cause oil price volatility, impacting India as a net oil importer, although its partial reliance on Russian imports mitigates this to some extent. This situation might result in an increased current account deficit of 1.5% to 2%.