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US Fed Rate Hike: Impact on Indian Market, RBI Policy Stance – Explained

US Fed Rate Hike: Impact on Indian Market, RBI Policy Stance - Explained

US Fed rate hike: The US Federal Reserve raised interest rates for the first time since 2018 on March 16, 2022 by 25 basis points. The Fed Reserve laid out an aggressive framework to push borrowing costs to restrictive levels next year in a bid to contain inflation, the worst in four decades, amid the COVID-19 pandemic and the Ukraine crisis.

The Federal Reserve has decided to hike rates to increase borrowing costs to slow growth and bring down high inflation. The bank has estimated that its policy rate will be in the range of 1.75 percent to 2 percent by the end of 2022. This rate is expected to increase to about 2.8 percent next year.

The US Federal Reserve had kept interest rates near zero since the start of the Covid-19 outbreak in 2020 to support growth.

US retail inflation

Retail inflation in the United States was recorded at 7.9 percent in February 2022 in the United States, the highest in 40 years since 1982. While deadly COVID-19 waves disrupted global supply chains and led to an increase in the prices of essential commodities, the recent invasion of Russia

Ukraine has put additional pressure on rising inflation as global commodity prices continue to remain high. The Ukraine war has majorly affected crude oil prices, driving them to $140 a barrel, the highest in 14 years.

According to the Fed Reserve, the current measures will be enough to contain record-high inflation. Federal Reserve Chairman Jerome Powell said high inflation is expected to ease by the second half of the year and fall to its target level of 2 percent by 2024. He also expressed confidence that a strong US economy would be able to expand even with less liberal monetary policy.

Impact of US Fed rate on Indian market

A hike in interest rates in the United States will have an impact on equity markets and debt around the world. Stock prices have already risen since the announcement, while the S&P 500 closed up 2.2 percent, the Nasdaq also closed up 3.7 percent and the Dow Jones also saw a jump.

India’s domestic market indices Sensex and Nifty also jumped higher on March 17. While the Sensex jumped 1,000 points, the Nifty crossed 17,200.

Impact of US Fed rate hike on RBI policy

Reserve Bank of India in Bi-monthly Monetary Policy Committee The meeting held in February 2022 had decided to continue with its liberal stance and kept the repo rate unchanged at 4 per cent and the reverse repo rate at 3.35 per cent. The CPI inflation estimate was retained at 5.3 per cent for FY 2021-22 and 4.5 per cent for FY 2022-23.

The RBI said in February that consumer price inflation has turned higher and despite cushioning in food prices, core inflation remains high and there has been a fresh rise in international crude oil prices.

However, crude oil prices have stabilized at least in Asian markets amid Russia’s war in Ukraine. The Indian market is expected to remain positive going forward, with particularly encouraging signs of the Russia-Ukraine conflict reaching the resolution stage.

This may allow the RBI to re-evaluate its accommodative stance in next month’s policy meeting, which is scheduled between April 6-8. Some economists also feel that with inflationary pressures normalizing, the RBI may have to revise its inflation forecast.

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