Vritaanta Volume 2 Issue 1 August 2015

22PedagogyAn article by Juhi Agrawal on the possible aftermath of Fed Rate hike on emerging markets.The Federal Reserve System popularly known In most of the emerging markets such as India, Africaas the ‘Fed’ is the central banking institution and Latin America the share markets are heavily dependentupon FII’s. This is because the people of theseof the United States of America establishedon December 23, 1913. The weight of the entirebanking system of U.S. lies on the strong shoulders stock markets. In India, the largest democracy incountries are very much reluctant to invest in thetheof the Fed, the responsibility of the entire financial structurelies in the capable hands of the Fed and the fates ofthousands and lakhs of investors around the world lies inthe decisions taken by the Fed. However the journey wasnever very smooth. The Fed was preceded by the FirstBank and the Second Bank of U.S. which were not verysuccessful. Then finally as and when the Fed arrived,things began to change drastically and even till date itrules the banking system of U.S.A.The provision of cheap credit has two major effects onthe American economy. Firstly, there is a lot of liquidityin the market as cheap credit is easily available and secondlypeople are reluctant to invest in the country as theyare lured by the high interest rates in other countries.This is good news not only for the investors but also forthe emerging markets where this money is poured into asthe industries and the corporate sectors are hugely dependentupon this flow of funds. These investors are referredto as the ‘foreign institutional investors’ (FII’s) andhave been granted special privileges such as non- applicabilityof MAT. The investments are made in the capitalmarkets and the money ultimately reaches out to thecorporate world.Fed Feeds FuturePowersworld, a country of 1.25 billion people, only 2 lakh peopleinvest in the stock markets. Such marginal participationmakes the emerging markets shaky and vulnerablefor the domestic investors.These foreign investors are lured towards emergingmarkets because of lower interest rates by the FederalReserve but now talks and lengthy deliberations aregoing on amongst the moguls of Fed Res to increasethe interest rates. Since years Fed had kept the ratesnear zero but cheap credit led to excessive demandwhich in turn led to inflation. The rates are expectedto be hiked towards the end of this year or later. JanetYellen has indicated that the effect shall not be feltmuch. However if the hike is done earlier or more thanexpected then the markets might react sharply. Forthe current year, FII investments in equity marketstood at 93000 crores. Now there are high chancesthat this hot money might soon leave the country.August 2015