Federal Reserve Hikes Rates Again: What It Means for Indian Markets, Investors

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Recently, the US Federal Reserve announced its fourth consecutive 75 basis point interest rate hike, which brought the benchmark federal funds rate to the range of 3.75% to 4%.
- US Federal Reserve is the central banking system of the USA.
The Fed also delivered a sharp tone in favour of over-tightening in a bid to contain inflation.

News Summary

The US Federal Reserve has yet again raised key interest rates in its fight against red-hot inflation in the country.
It raised the key policy rate by 75 basis points to over a decade high at 3.75-4.0 per cent in its latest monetary policy meeting.
Notably, this is the fourth consecutive hike of such magnitude.

Inflation in the US remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.
However, the Central Bank of US only has the tools to control the demand side — which it is using to bring inflation in line with its mandate of 2%.
- Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.
The Fed has said the battle against inflation would require borrowing costs to rise further.

On RBI
- Many analysts believe that the current rate hike by US Federal Reserve will nudge the RBI to do the same.
- But it is not true. RBI will not blindly follow the Fed and other central banks in raising rates.
  - The RBI considers domestic factors, especially retail inflation, while reviewing the interest rates.
- However, high imported inflation has added to the retail inflation in India, and RBI has already raised the repo rate by 190 bps over the last six months.
  - With the recent hike by US Fed, there is a chance that India might import inflation and if this happens, RBI would be forced to increase the rates in India.
On Indian Market
- Fed’s continuous rate hikes does not augur well (something good is predicted to happen) for emerging markets including India.
- An increase in US interest rates results in an outflow of funds to US markets, putting Indian stock markets and currencies under pressure.
- Equity markets are likely to see increased volatility in the next few months.
On Indian Rupee
- The outflow of funds from Indian markets will have an impact on the exchange rate of Indian rupee against the dollar.
  - The Indian rupee has been losing value against the dollar since early 2022.
- A weaker rupee should help Indian exporters at some-level. Nonetheless, the chances of a recession in the rich world, including the US, have gone up and that will hurt them more.