The US Federal Reserve's decision to keep the interest rates unchanged for the time being is likely to be a positive development for the Indian stock markets and the broader economy. The decision has given room to Raghuram Rajan to cut interest rates in India. The Federal Reserve's decision helped Indian markets rally on Friday with the Sensex gaining over 250 points. Analysts feel that going forward, markets may remain volatile as the Fed's concern over weak economic outlook in China and other emerging economies might keep global investors quite cautious.
India's better fundamentals — lower CAD and lower inflation among others — may keep India attractive for global investors. Analysts are confident that the RBI's next monetary policy meet might provide buoyancy to the Indian markets. U.R. Bhat , MD at Dalton Capital Advisors feels that, "the Federal Reserves' decision is a breather for India as it gives the RBI's governor enough leeway to cut interest rates now which he probably would later this month."
The US Federal Reserve feels that the recovery in the US economy is getting overwhelmed by the sluggish growth elsewhere, especially in China where the economic slowdown is expected to be more severe. If the Fed had raised the interest rates, it would have led to a huge outflow of foreign money away from the slowing emerging economies to the US where the economic prospects look more entrenched. India has seen an outflow of over Rs 20,000 crore of foreign money since August from its stock markets. "However, that outflow would subside now," says Bhat.
There might not be huge inflows but the outflow may be capped. Domestic Indian investors, especially its financial institutions, have been big buyers of stocks sold by foreign investors and that might help stabilise Indian markets.
Moreover, "the fact that India is at the start of economic recovery would keep India attractive for foreign investors" says Bhat.
India's macro fundamentals have improved over the last one and a half years. Lower commodity prices have helped India register a surplus in its current account in recent quarters which is a significant improvement from the deficit in 2012-13.
The fiscal deficit and inflation also remain under control and foreign investors have taken positive note of these facts. The government is doing its best to keep India an attractive destination. The government's move to consider allowing more FDI in private banks, a sector foreign investors are very interested in, would also lead to more inflows.
The government is also mulling over allowing state pension funds to invest more in equity markets and that may provide a further philip to India's stock markets.