2 hrs ago
US Fed Rate Hike Puts Indian Markets, Rupee Under Watch
The United States Federal Reserve is expected to raise interest rates.
This would make borrowing more expensive in the United States.
Higher US rates can make investors prefer American assets over investments in India.
That could put pressure on Indian stocks, the rupee and bonds.
The Reserve Bank of India may keep its rates unchanged in October, but it could face pressure to raise them sooner.
Gold and silver prices have recently recovered after falling for three weeks.
Investors are watching what the Federal Reserve says about future rate increases, not just the hike itself.
A tougher message could hurt markets, while a more cautious message could help them.
Traders are pricing in a 25-basis-point Federal Reserve hike to 3.75%-4.00%, potentially the first increase in more than three years.
Markets have shifted from pricing a 60% chance of a cut to a 92.5% chance of a hike in roughly two weeks.
Higher US Treasury yields and a stronger dollar could pressure Indian equities, the rupee, bonds and foreign investment flows.
Foreign institutional investors have sold more than ₹14,400 crore of Indian stocks over the past two weeks.
The Reserve Bank of India may remain on hold in October, though a US Fed hike could increase pressure for earlier tightening.
- Who
- The United States Federal Reserve, Indian investors and the Reserve Bank of India are central to the story.
- What
- The Federal Reserve is expected to announce a 25-basis-point interest-rate increase and provide guidance on future policy.
- Where
- The decision will affect US and Indian financial markets, including Indian equities, bonds, the rupee and commodities.
- When
- The decision is scheduled for Wednesday, 16 September, after a two-day meeting.
- Why
- Rising US inflation, Treasury yields and oil prices have increased expectations of tighter monetary policy.
Cautious or Dovish Outlook
Hawkish or Tightening Outlook
Effect of the expected hike
Cautious or Dovish Outlook
The increase may already be fully priced into markets, limiting its immediate impact.
Hawkish or Tightening Outlook
A hike accompanied by guidance about more increases could keep pressure on equities, bonds and emerging-market currencies.
Reserve Bank of India response
Cautious or Dovish Outlook
The Reserve Bank of India may remain on hold in October because tightening during an energy shock could hurt growth.
Hawkish or Tightening Outlook
A Federal Reserve hike, persistent inflation and fiscal support could pressure the Reserve Bank of India to raise rates earlier.
Gold and silver direction
Cautious or Dovish Outlook
A cautious Federal Reserve tone could extend the recent recovery in gold and silver.
Hawkish or Tightening Outlook
A message signaling further tightening could send Treasury yields higher and test support levels for the metals again.
Key facts
- Expected Fed move
- A 25-basis-point increase, taking the benchmark rate to 3.75%-4.00%.
- Probability priced by traders
- The CME FedWatch tool showed a 92.5% probability of a hike, compared with a 60% probability of a cut two weeks earlier.
- US Treasury yields
- Yields could rise above or remain near 5%, potentially making emerging markets less attractive.
- Indian foreign flows
- Foreign institutional investors sold more than ₹14,400 crore of Indian stocks over the previous two weeks.
- RBI outlook
- Axis Capital expected the Reserve Bank of India to remain on hold in October, with a hike currently expected in December.
- Gold price
- MCX gold rose ₹1,040 to ₹1,51,850 per 10 grams on Wednesday.
- Silver price
- MCX silver rose ₹3,303 to ₹2,35,421 per kilogram on Wednesday.
Quotes
V K Vijayakumar
Chief Investment Strategist at Geojit Investments
“With the rate hike itself largely priced in, the market's attention now shifts to the Fed's tone on future policy. If today's statement signals more hikes ahead to keep tackling inflation, these support levels could be tested again”
livemint.com
“Higher inflation typically pushes central banks toward tighter policy, and the resulting rise in US Treasury yields to near 5% has been the key headwind for non-yielding metals like gold and silver over the past three weeks.”
livemint.com
Sources
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