How Fed rate hike will impact India?

In his maiden policy meeting, the US Fed Reserve Chairman Jerome Powell announced a hike of 25 basis points to the US benchmark interest rates, bringing it to a range of 1.5 to 1.75 per cent. This is the fourth hike within a year. The Fed hasn't hiked rates four times in a year since 2006. The reason for this widely expected rate hike is historically low unemployment rate in the US and the confidence in the growth of the US economy, which is picking up strongly.

Moreover, the commentary of US Fed remained on expected line and we can expect three more hikes in the current year. Now let us discuss how this rate hike and commentary is going to impact India?

Interest rate

With the rise in key policy rates in the US, India cannot afford to lower its key policy rates, despite, inflation easing as indicated in the latest data. Any rate cut in India could trigger dollar outflow, which will ultimately weaken the Indian rupee. Hence, rate cut cycle in India will pause for a while. Therefore, if you are an investor in long-term bond fund, you can think of exiting the fund and entering short-term bond fund.
 

Equity Market

Normally, a hike in interest rate in the US does not augur well for the emerging markets and commodities. The reason being it strengthen the US dollar and weakens local currencies. This will hurt companies with large import bills, however, the same benefit may not be accrued to exporters due to strong competition in the export market.

However, this time, the tone of the commentary by the US Fed Chairman remained less hawkish and hence we do not see much volatility in the exchange rate of INR against USD. Also, the Indian equity market opened in the green today. One of the reasons for such calmness is that most of what has unfolded was already priced in by investors.