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.
