What is the issue?
- The U.S. Federal Reserve policy statement and fresh economic projections are due to be released soon – amid expectations of a hike.
- US Federal Reserve rate hike could impact Indian interest rates and analysts expect a quarter-point hike in the next sitting.
What are the implications?
- The projected US Fed rate hike comes in the backdrop of a sharp uptick in hiring alongside a rising inflationary trend in the US economy.
- A Fed rate hike could potentially impact the macroeconomic outlook in other emerging Policy economies, including India.
- RBI hiked the repo rate by 25 basis points in its recent meet, effectively signalling a reversal of the easy money policies of the last three years.
- The RBI rate hike was to enable foreign investors retain their arbitrage advantage and thereby stem outflow of hot capital.
- If not for the rate hike by RBI, it would’ve led to weakening of the rupee and an estimated capital outflow of over Rs 40,000 crores is likely in 4 months.
How have the markets reacted?
- Equity market performance has varied across regions, with the Advanced Economies (AEs) clocking modest gains on strong first quarter earnings.
- In major Emerging Market Economies (EMEs), there have been selloffs on a rising dollar and expectations of further rate hikes by the Fed.
- The US 10-year sovereign yield crossed 3% in mid-May on strong economic data and expectations of tighter monetary policy and fiscal expansion.
- Across most EMEs, however, bond yields have risen on lower foreign appetite for their debt due to growing dollar shortage in the global market.
- In the currency markets, the US dollar touched its highest level in May since December 2017, while Euro slid significantly against the dollar.
- EME currencies have also by and large, depreciated against the US dollar.
Source: Indian Express