The Federal Reserve’s policy meeting is scheduled today, in which the United States’ central bank is expected to increase interest rates by 25 basis points. Ahead of the meeting yesterday, anticipating higher rates, not only US stocks market was tense but Indian markets were too.
The expectation of higher Fed rates gained momentum when the newly-appointed Federal Reserve Chairman Jerome Powell last month indicated that the Fed will go ahead with interest rate hikes despite the market turmoil. Fed rates are similar to RBI’s repo rate, which are used to control inflation. The only difference is that RBI’s repo rate currently is 6%, while US Fed rate is just 1.25%, which may be hiked to 1.5% today.
Here’s how US Fed rate hikes can impact India:
In the globalised world, markets are connected. An increase in Fed rates will be negative in general for the US stock market and if it leads to another round of sell-offs, it will also have ripple effects on the Indian market.
Rupee Vs Dollar:
If the Fed rates are hiked, the value of the dollar would go up, thus weakening Indian rupee in comparison. This might hurt India’s forex reserves and imports. However, the weaker rupee is good for India’s exports but low global demand and stiff competition would not leave much room for Indian exporters to capitalise the situation. DBS said that India’s financing requirements will keep the rupee vulnerable to rising US rates this year.
Bond market pressure:
Due to the higher Fed rates, US’ 10-year bond yields are expected to go up, which will also put pressure on India’s 10-year government bond yields.
RBI repo rate:
With higher Fed rates weakening the Rupee, India’s imports bill is likely to go up putting pressure on the RBI to either increase repo rates or at least refrain from cutting rates in the upcoming monetary policy meetings.
First published on March 20, 2017, at www.financialexpress.com