Impact of BOJ interest rates hikes on India Equity Market

 On July 31, 2024, Japan's Central Bank made a significant move by raising its benchmark interest rate to "around 0.25%" from its previous range of 0% to 0.1%. This marked the first time in 17 years that the BOJ has increased its policy rate. This decision, combined with weaker U.S. labor market data, led to the U.S. Dollar declining approximately 9% against the Japanese Yen.

Impact on Indian Equity and Debt Markets

1. Shift in Global Risk Sentiment:

   • The increase in Japanese interest rates has the potential to alter global risk sentiment. Investors might become more cautious, leading to a preference for safer assets and a subsequent outflow of investments from emerging markets like India. This shift could result in selling pressure on Indian equities as global risk appetite diminishes.

2. Interest Rate Differential:

   • The rate hike by the BOJ could narrow the interest rate differential between India and Japan. This change may make Indian bonds less attractive to investors, potentially triggering an outflow from both the bond and equity markets in India.

Political Stability and Future Outlook

According to recent news from Reuters, due to political instability, Japan is expected to pause further interest rate hikes for now. However, this pause is not anticipated to last in the long term.

Conclusion

While the direct impact of the BOJ's rate hike on Indian equities may be limited, the indirect effects—such as shifts in global market sentiment, changes in capital flows, currency movements, and the narrowing of interest rate differentials—could lead to increased volatility, impacting various sectors in the Indian market