In a sharp policy shift, the US Federal Reserve said it would end its pandemic-era bond purchases in March and raise interest rates thrice next year to cope with surging inflation.
"The economy no longer needs increasing amounts of policy support," Fed Chair Jerome Powell said in a news conference, adding that spending by businesses and consumers is likely to remain strong. The central bank needs to shift focus on the threat posed by inflation to help the economy sustain its expansion, he said.
With the three hikes, the rate will be in the range of 0.6-0.9 percent in 2022 as against the current rate of 0.1 percent.
How will it impact India?
For Indian companies, the rate hike and fund reduction are likely to impact the availability and cost of overseas finance. Foreign portfolio flows into the Indian equity and bond markets could slow.
The hike in interest rates in US could also lead to global funds pulling out money from Indian government securities. This could result in the Indian central bank raising interest rates to prevent FPI outflows from the Indian bond market.
FPIs pulling money out of the equity and bond markets could weaken the rupee even as the dollar gets stronger with the rate hikes.
What industry experts feel
Some experts believe more than the rate hikes, a quicker end to the Fed’s asset purchase programme is a bigger threat for the India stock market.
“I feel the bigger worry should be the closing of the liquidity tap. A faster-than-anticipated tapering would hurt equity market sentiments,” Mint quoted Sahil Kapoor of DSP Investment managers, as saying. Despite the three rate hikes, the benchmark rate would remain historically low at below 1 percent, the expert said.
Also read: As US begins rate hikes, RBI needs to move on normalisation path: Morgan Stanley's Chetan Ahya
“Repercussions would be felt in the form of accelerated foreign institutional outflows and a strong dollar, both of which do not bode well for emerging market equities," Mint quoted an anonymous fund manager as saying.
Sushil Kedia, Founder of Kedianomics, told Fortune India that Nifty could witness a “Santa rally,” which may take it beyond 18000.
US rate hikes could propel other central banks to take similar measures, which could hurt Indian market sentiments. "Rising inflation globally will create a path for rate hikes sooner than anticipated, which is increasing volatility in the market," Fortune India quoted Vijay L. Bhambwani of Equitymaster as saying.
(Edited by : Shoma Bhattacharjee)
First Published: IST