Is the Fed reserve reacting behind the curve?
US inflation is currently at 41 year high which has made people worried about the Fed rate hikes and its aggressive move. What will be its impact on the Indian Stock Market and global markets?
So First let us discuss how does inflation works? When there is inflation usually the central bank it is the Federal Reserve of the US, raises its policy rates in order to regulate the money flow in the economy. This helps in reducing the demand and decreases the purchasing power of people which further controls the flow of money in the economy.
Now as the US economy is a want-based economy and if they decide to curb inflation rather than focus on the growth of the economy then there may be chances of economic slowdown or recession. The extra aggressiveness from the Federal Reserve may lead to an increase in the Interest rate and a decrease in demand, the impact of which may be seen within 6 to 15 months.
Now talking about the global market so there may be a quite possibility of the Market reacting negatively.
Because of rising gas, food, and rent costs, tightening household budgets, and pressure from the Federal Reserve to raise interest rates swiftly, the probability of a recession increased, driving U.S. inflation to 9.1 % in June.
The government’s consumer price index climbed 9.1 percent over the previous year, the highest annual gain since 1981, with rising energy prices accounting for over half of the increase. There will be a cascading impact on China due to the US Commodity market as the consumption supply will reduce and economies may suffer. There is also a rise in gasoline prices for countries like Europe and the US.
Did you know that the last time inflation was high was November of 1981 and there was a Global recession in 2008?
Let us now discuss its impact on the Indian Markets. As far as India is concerned we know that it is a need-based economy. The key impact will be seen in commodity prices. In India currently, the Inflation rate stands at 7.01%.
The commodity prices are going down. Agro commodity prices may go down if there is more farm production which will be beneficial for the decrease in their prices.
Now Looking at the positive picture in the past Few months FIIs selling has also reduced. However, there may be a short-term impact of 6-9 months’ time and price correction may be their US yield can go from 7.36 up to 7.89 %. This is majorly due to falling interest rates & quantitative easing.
Impact on Indian Stock Markets:
Given that the difference in interest rates between India and the US is narrowing, India would lose some of its appeal as a destination for currency carry trade. A churn in emerging market equities due to greater returns in the US debt markets might potentially affect foreign investors’ enthusiasm for investing in India, due to the outflows from Indian equities and debt markets, this might have an effect on currency markets.
In response to ongoing inflation as well as ongoing good job and pay growth, Fed policymakers have already indicated a second 75 basis-point increase in interest rates later in July. Traders had fully priced in a three-quarter percentage-point increase for this month even before the figures were revealed.