Implications of US Federal Reserve’s Rate Hike

 

Context:

·       The US Federal Reserve has raised interest rates by 25 basis points, the first hike since 2018.

  • And has outlined an aggressive stance that also includes balance sheet reduction aimed at fighting record high inflation.

 

What is the Impact?

  • Markets responded positively to the clear path outlined by the world’s largest central bank, with US markets closing higher by 2 per cent and Indian stock markets opening with a gap of more than 1 per cent on Thursday.
  • Commodities retreated with the Brent crude oil falling and remaining below $99 per barrel, sharply lower than the $139 per barrel recorded just a few days ago.
  • Going forward, Indian and global markets are expected to stay positive as three major uncertainties seem to be over — the Assembly elections in five Indian states, the US Fed’s decision, and signs of the Russia-Ukraine conflict entering a resolution phase.
  • Any spike in commodity prices could cause corrections in equity markets, even as the broader trend of rising stock prices remains intact.
  • The Fed’s decision to hike rates and rising domestic retail inflation rate will have a direct bearing on the Reserve Bank of India’s monetary policy review at the next meeting of the Monetary Policy Committee scheduled between April 6 and April 8.
  • Unlike the US Fed, which has clearly reversed course from its accommodative monetary policy, the RBI continues to hold an accommodative stance. This is partly because the retail inflation in India has not breached the set target range of the RBI.
  • As per recent data, domestic retail inflation rose to an eight month high of 6.07 per cent in February, breaching the upper tolerance level of medium-term inflation target of 4+/- 2 per cent for the second month in a row.
  • Some economists argued that the RBI may have to revise upward its inflation forecast as inflationary pressures are becoming generalized.
  • A reassessment of the current accommodative stance of the central bank is also possible.
  • This is the fifth consecutive month of rising inflation. Retail inflation was at 6.01 per cent in January 2022 and 5 per cent a year ago.
  • The RBI has projected retail inflation at 5.3 per cent for FY22, with Q4 inflation at 5.7 per cent before easing to 4.9 per cent in Q1 FY23.

Source: THE HINDU

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