RBI is nearing its inflation target, but the US still has a long way to go! Hence they are still hawkish. How will US Fed’s hawkishness impact RBI’s rate hikes?
It has been three weeks since the last Fed meeting, where they temporarily paused rates. Fed Chair Jerome Powell made it clear that the pause is not permanent and that we might see two more rate hikes in the near future. The recently released meeting minutes align with this stance. Additionally, they also mentioned the possibility of a mild recession occurring in the US is quite likely.
This presents a challenging situation for the US Federal Reserve. They are still about 200 basis points away from reaching their 2% inflation target. The labour market remains tight, and talks of a mild recession are already circulating. Hence, the Fed will have to find a delicate balance.
Considering the interconnectedness of global economies, the impact of the US Fed’s actions on India’s economy becomes crucial.
And that brings us to the question, how will this situation unfold for India, and how might these insights influence RBI’s rate hikes?
The June pause in interest rate hikes by the Federal Reserve brought temporary relief to the markets. However, the recently published meeting minutes revealed a hawkish tone, which did not fully comfort the markets. We also saw a modest decline in Dow, S&P and Nasdaq on 5th July 2023, after the market participants digested the minutes of the meeting.
The minutes explicitly stated that a significant majority of policymakers, nearly all of them, agreed on the need for further tightening later this year. This, along with other data, strongly suggests that the Fed’s tightening cycle is not yet complete.
Summary of the FOMC Meeting
The FOMC minutes highlighted the committee’s view that further tightening would be necessary this year to address elevated inflation and bring it down to the 2% target. However, the pause in June was intended to provide more time to assess progress towards the committee’s goals.
The report mentioned some key indicators, such as nominal wage and PCE inflation.
Nominal wage growth remains elevated but has decreased from its peak last year. Average hourly earnings increased by 4.3% over the past 12 months, down from 5.9% early last year.
While total PCE price inflation has eased due to declines in energy prices and softer food price inflation, core PCE price inflation, which provides a better signal for future inflation, has remained relatively stable.
Given that inflation is significantly above the committee’s long-term objective of 2%, participants anticipated that below-trend growth in real GDP and some softening in labour market conditions would be necessary to soften inflation. These measures will gradually ease inflationary pressures and help achieve the target of 2% over time.
Ripple Effects on RBI’s Rate Hike Decisions
The US Fed’s hawkish stance can significantly affect the Indian economy. The RBI is close to achieving its 4% inflation target, but it needs to be cautious about the impact of the Fed’s actions as it can affect USD/INR value and hamper FPI investments in India. This is because if the US hikes rates, the US treasury will become attractive, and the dollar will become stronger.
The RBI must find the right balance between managing domestic growth and also considering US hawkishness to make informed decisions going forward.
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 purposes only. This is not an investment advice.