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

What’s in Today’s Article:

• News Summary

Why in news?

• 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.

Reasons behind this hike

• 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.

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Rate hike and impact on India

• 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.