Even as the American economy, like others in the world, is facing high inflation and the pace is hitting 40-year highs, the US central bank will today conclude its monetary policy meet and announce its decision on the interest rate hike. Analysts expect the US Federal Reserve to hike the policy rate by 75 basis points (bps).
They said a rate hike of up to 75 basis points has already been factored in by the Indian stock markets but the US Fed’s commentary on growth, inflation and future rate hikes will be the key watch out for. Here’s what they say about the possible US Fed rate hike and its impact on India:
What is the Inflation Scenario in the US?
According to the latest data, consumer price inflation in the US increased 8.6 per cent year-on-year in May, which is the largest increase since December 1981 and followed an 8.3 per cent advance in April. The prices in the US accelerated on the back of high fuel prices and costlier food.
Natural gas prices in May jumped 8 per cent, the pace is the highest since October 2005, while electricity rate also rose 1.3 per cent. Food prices in May rose 1.2 per cent as part of the impact of supply chain disruptions due to the Russia-Ukraine war. Prices of dairy and related products also posted the largest gain since July 2007.
US Treasuries have jumped since the start of April and is above the 3 per cent mark.
FOMC Meet: What Is Being Expected
Given the latest inflation print of 8.6 per cent as against the US Federal Reserve’s target to control it under two per cent, most economists and analysts expect the American central bank to go for a 75-basis-point hike in the Fed fund rate. However, they said more than the rate hike, it’s the commentary that is important.
Ravindra Rao, head (commodity research) at Kotak Securities, said, “The base case for the Fed was to raise the interest rate by 0.5 per cent at its June meeting. However, after the latest US inflation data, market players are seeing an increased possibility of a 0.75 per cent hike today.”
He added that apart from the Fed decision, market players will also focus on economic projection as it will give more clarity about how the interest rate is expected to rise as well as what will be its impact on economic growth.
VK Vijayakumar, chief investment strategist at Geojit Financial Services, said, “More than the quantum of the rate hike (50 or 75 bps), it would be the message from the Fed in the policy announcement that would determine the market direction. The market is prepared for a 75-bp rate hike and, therefore, that decision, if it comes, is unlikely to rattle markets.”
Stating that inflation in the US is soaring and the market expects aggressive cuts, Arun Malhotra, founding partner & portfolio manager at CapGrow Capital Advisors, said the US Fed is expected to go for a 75-bp hike and another 50-bps at the next meeting .
What Will Be The Impact On India?
High inflation and the interest rate hikes in the US have been adversely affecting the Indian markets for quite some time. Foreign portfolio investors are pulling out their money from the Indian market. Experts said the possible rate hike by the US Fed of up to 75 basis points has already been factored in by the markets.
Kotak Securities’ Rao said, “Fed’s aggressive stance is largely factored in. So, the possibility of a negative surprise is low. If the Fed’s decision comes largely in line with expectations, there is a possibility we may see some correction in the US dollar which may help commodities recover.”
The Sensex has declined about 1800 points in the past three days amid looming fears of stagflation and volatility ahead of the US Fed meeting decision. The aggressive rate hike of 50-75 bps is mostly factored by the market but updated economic and interest rate forecasts to be detailed by the central bank’s will closely control the future trend.
CapGrow’s Malhotra said, “The markets have factored in these hikes. There will not be much of an impact. Fed is trying for a smooth landing so as not to hurt growth. Wage inflation is still quite high, and the inflation numbers are not going down anytime soon. We may see some moderation by Q4CY22.”
Foreign investors have pulled out about Rs 14,000 crore so far this month. With this, the net outflow by foreign portfolio investors (FPIs) from equities reached Rs 1.81 lakh crore so far in 2022, data with deposits showed. The outflows are adversely affecting the Indian currency also, which has touched its all-time lows multiple times in the past few months.
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