Contrary to concerns over the impact of the US Fed interest rate hike on India, a global brokerage says such a move will be positive for the domestic markets as it will remove uncertainty and bring in more inflows.
But a delay could induce more volatility and halt inflows, according to Bank of America-Merrill Lynch (BofA-ML).
The bank expects a 25 bps hike in key lending rates by the US Federal Reserve at its two-day meeting on 16 and 17 September.
The US central bank has kept policy rate at a record low since the global financial crisis of 2008. However, a robust improvement in the US economy in the past two years has given enough leeway for the country's central bank to start tightening its monetary policy.
A rate hike by the US Fed is generally seen as a major negative for emerging markets such as India, as it could lead to a sharp depreciation in the currencies of those countries. In such a scenario, stock markets in emerging markets may see heavy sell-off, triggering massive outflows.
Nevertheless, BofA-ML said that India could benefit from a rate hike, given its relatively higher gross domestic product (GDP) growth.
"While there could be a kneejerk sell off across EMs, India would likely emerge as relative value, given relatively higher growth," the brokerage said.
Besides, heavy volatility in the Chinese stock markets may force investors to turn to India.
"Portfolio flows could resume in equities due to risk diversification out of China's volatile equity markets and in bonds following the junking of Brazil by S&P, provided the RBI hikes the G-Sec limits for foreign funds," it said.
Standard & Poor's downgrade of Brazil's credit rating to junk will also be helpful for India if a rate hike by the US central bank triggers a crisis in emerging markets.
The bank warned that a postponement in rate hike by the Fed to October or December could affect inflows into India.