Watch: How Indian stock markets will react if US Fed hikes interest rates ...

Zee Media Bureau

The US Federal Reserve is expected Wednesday to increase its base interest rate for the first time since 2006, a momentous step that will have repercussions across the global financial system.

If the Fed lays out an aggressive schedule of future rate increases, stock markets could become very volatile and even plummet, say strategists.

Since the Fed has been flagging an imminent rate rise for much of this year, the increase itself should not have much impact. Interest rates have already tightened, and the US dollar has strengthened, in expectation. Stock investors have had time to prepare.

What is important is what the Fed indicates about future rate increases. If the Fed`s economic forecasts on Wednesday point to relatively rapid increases, the dollar could rise further. Meanwhile other currencies, particularly in emerging markets, could fall, hurting those with significant dollar debt and dollar-based costs.

While a rate hike is almost fully priced in, a more hawkish Fed on the path of interest rate increase could cause some volatility. Overall if it goes as expected it should reduce the uncertainty around the Fed policy, analysts said.

Relatively rapid hike in interest rates by the US Fed may also lead to flight of capital from India putting pressure on Dalal-Street and Rupee in foreign exchange (forex) market.

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