Federal Reserve’s rate hikes signals and Indian markets

Context

The US Federal Reserve has hinted at the possibility of two rate hikes by 2023, leading to a fall in market indices.

• In India, the benchmark Sensex fell marginally and the rupee lost over 1% against the dollar.

About the Federal Reserve hiking of rates

• The American Federal Reserve signaled that there could be at least two rate hikes by 2023.
• The step is taken up as economic activity indicators have strengthened and inflation has firmed up.

What could be the impact of an early hike in interest rates?

• A hike in interest rates in the US has a bearing on debt and equity markets.
• It will impact not just the US but also the emerging economies such as India.
• The Fed’s indication of a hike in interest rates resulted in a rise in bond yields and a strengthening of the dollar.
• It impacts currencies and stock markets in emerging economies.
• It will lead to an outflow of funds from equities into US treasury bonds and also to an outflow of funds from emerging economies to the US.

What are India’s inflation concerns?

• The wholesale inflation has been rising forthe last five months and is expected to rise more as the impact of high crude prices and surging commodity prices feed in.
• The food inflation for retail rose significantly higher.

What can the RBI do?

• The rising global crude oil and commodity prices are expected to push up WPI inflation further.
• RBI is unlikely to change its accommodative stance or the policy rate anytime soon, it remains to be seen how it responds to developments around the world on interest rates.
• Meanwhile, as there is no further scope for a rate cut by RBI, all eyes are on the government for fiscal policy action to spur growth.