The US Federal Reserve has just marked its tenth-rate hike of 25 bps, opening the door to a pause in its tightening monetary policy. Will India feel the aftershocks?
A few days back, the US Federal Reserve raised interest rates by 25 basis points, marking the tenth consecutive rate hike done by the US Federal Reserve!
Yes, and this was a surprise as after nine hawkish rate hikes, we saw a banking crisis that hit and spooked the US citizens. But, despite such dire consequences, the Federal Reserve was committed to its hawkish stance to curb inflation.
But what does this mean for the Reserve Bank of India (RBI)? Will it be a boon or a bane? Let’s explore.
What’s Happening?
The Fed’s decision to increase interest rates in May 2023 by 25 basis points has taken the rate range from 5.00% to 5.25%. This is a significant increase of 500 basis points since the rate hike cycle began in March 2022.
The Federal Reserve aims to cut down inflation, and they have somewhat achieved a part of their goal. But it seems that the Fed wants inflation to hit its 2% mark.
The Fed Chair Jerome Powell hinted that there could be more rate hikes in the future. This decision is surprising because not only is the US banking sector facing a crisis, but also the US GDP rose at a 1.1% pace in the first quarter, indicating that the economy is slowing down.
Apart from this, we are seeing that the US Federal Reserve says a certain thing, but the markets hear it differently. For example, we know that the US Fed has been hawkish on rate hikes for a while, but as per a recent report by Reuters, the US interest rate futures indicate a broader expectation for no hikes in the next two policy meetings of the central bank.
But, as the markets were expecting the Fed to slow down rate hikes given the current economic situation, it did happen, and the Fed ended up with a 25 basis point hike in May 2023.
Moreover, in his post-policy conference, Powell indicated a pause in the current rate hike cycle while stating that the Fed was not done with rate hikes yet and inflation is well above Fed’s 2% target.
Key Takeaways of the Federal Reserve Meet
Despite the macroeconomic challenges, Fed Chair Jerome Powell maintains a hawkish stance on potential rate hikes.
In the recent meeting, Powell emphasised that future rate decisions would depend entirely on data flows, particularly consumer inflation, PCE inflation, unemployment rates, and GDP growth.
The Fed’s economists warned of the risk of a recession due to the banking turmoil. But Powell remains optimistic that a soft landing is possible and recession can be avoided.
Powell points out that the unemployment rate is currently at 3.5%, which is the same or even lower level as the rate hike cycle started.
How Will This Move Impact India?
In the last Monetary Policy Meeting, the RBI kept the repo rate unchanged. But, if the US Fed keeps a hawkish stance, it can have significant implications for the Indian economy.
This means that if the Fed continues to hike interest rates, it could lead to a potential outflow of money from the Indian markets to the US, making it challenging for the RBI to maintain a balance between growth and inflation.
On the other hand, if the US Fed keeps a softer stance and pauses for a while, it will make the RBI’s task much more manageable.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information only. This is not investment advice.
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