What Fed’s Aggressive Stance Could Mean For India?

What Fed’s Aggressive Stance Could Mean For India?

The Federal Reserve chairperson Jerome Powell foreshadowed the upcoming Fed’s moves. How will it impact India? Let’s find out.

What’s Happening?

A few days back, the Federal Reserve Chairperson, Jerome Powell, said something that sent chills worldwide! He gave a hint of what’s to come at the upcoming Fed’s rate hike meeting. Powell stated that there’s still work to be done, indicating a hawkish stance on further rate hikes.

To fuel the fire, investment giant BlackRock predicted that the Fed could increase interest rates to a staggering 6% and hold them there for an extended period to combat inflation.

But that’s not all. On the same day, something extraordinary happened in India. The yield curve inverted for the first time in eight years, causing widespread panic among investors.

To understand it better, the yield curve shows the yield trend of one-year and ten-year bonds. The ideal curve slopes upward, indicating investors are more optimistic about the long-term outlook than the short-term. However, in this case, the yield on the one-year Treasury Bill exceeded that of the benchmark ten-year bond yield, creating a flatter inverted curve.

Since January 2023, the 10-year bond yield has remained within a range of 7.30% to 7.46%. On the other hand, the 364-day Treasury Bill yield has experienced an upward trend, rising from 6.91% to 7.48% over the same period. 

Now, investors often view rate hikes as a bad thing with a view that it kills short-term economic growth. So, on the one hand, the Indian yield curve has inverted, and on the other hand, Fed has a hawkish stance on rate hikes making investors worried about what would happen next.

How Could Fed’s Aggressive Rate Hike Impact India?

Previously we have discussed the fascinating relationship between the US interest rate hike and the dollar’s strength. When the US hikes rates, the dollar becomes stronger, and hence money flows from the world to the US, making the dollar index stronger.

However, according to a recent report by the esteemed investment bank UBS, Chile and India’s yields are most vulnerable to a scenario of Fed tightening over the next 1-3 months. The report highlights India’s relatively high sensitivity to rising local bond yields, indicating that the Indian equity market has further downside risk from domestic inflows.

But let’s remember that every situation has two sides. According to the Times of India report, India’s GDP grew by an impressive 6.3% YoY in the July-September quarter of FY22. This growth indicates that India presents significant potential and opportunities as an export hub and investment destination, particularly in the manufacturing and services space.

Only time will tell what the future holds, but one thing is for sure – India remains an exciting destination for investment and growth.

That’s it for today. Don’t forget to share the article with your friends. Until then, stay curious!

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