US Fed meet: 75 bps interest rate hike likely amid inflation; ‘India looks better placed to brace the impact’

India’s macro and corporate fundamentals are currently on much better footing.

US Fed meet: 75 bps interest rate hike likely amid inflation; ‘India looks better placed to brace the impact’
Global policy tightening will adversely impact India. Image: AP Photo/John Minchillo, File

By Sujan Hajra

During the July 2022 meeting, the Federal Reserve is expected to increase the fed fund rate by another 75 bps. There is an outside chance of even a 100 bps rate hike as well. Given the abnormally high inflation, continuation of aggressive rate hike by the fed Is expected. It is likely that at the peak, the Fed fund rate would be around 3.5-3.75%. Much of these would be affected during 2022 itself. Financial markets have also more or less priced in the same.

A large part of the current inflation is supply sided. Spike in commodity prices due to the war in Europe, geopolitical uncertainties, lingering impact of the pandemic on the global supply chain, logistic problems and shortage of microchips are resulting in flare inflation in most countries. Yet, while developed countries in North America and Europe are facing their respective 2 to 7 decade high inflation, inflation in most emerging market countries are below respective decadal highs. 

Developed countries did not fully reverse the rate cuts and liquidity infusion affected in the aftermath of the Global Financial Crisis, 2008. Monetary policies in these countries remained extremely accommodative for almost 15 years, which supported demand. These countries also unleashed unprecedented fiscal stimulus to neutralise the dampening effect of the pandemic on demand. Fiscal deficit to GDP ratio in countries such as Australia, Canada, UK and US hovered in the range of 14-25% in certain quarters in 2020 and 2021. These measures further boosted demand. Most of the OECD countries outside Asia clocked one of their best growth performances during the quarter ending March 2022. This, however, has not been true for most emerging market countries including India and China.

OECD countries in Europe and North America are showing classic signs of overheating and would require serious monetary, fiscal and liquidity tightening. These measures, however, would substantially prune the growth outlook and may even result in a recession. While India’s macro and corporate fundamentals are currently on much better footing, in an interconnected world, the country or financial markets cannot remain totally unscathed. Global policy tightening will adversely impact India. Yet, with better fundamentals, relatively lower dependence on foreign capital and low trade to GDP ratio versus most peers, India is much better placed to weather the current situation.

(Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers. Views expressed are the author’s own.)

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