The announcement of the possibility of the US Federal Reserves, hiking the rate of interests, on January 27th 2022, has shook the markets in India, sending shivers down the spine of the investors.
The consumer prices in USA rose vehemently, it was the highest rise in nearly four decades, to tame this 7% inflation, the US Federal reserves would be subsequently increasing the interest rates in the economy from the beginning of March 2022.
The unprecedented hike in inflation took the centre stage on the globe in mid 2021, when almost all the countries were facing the issue of immense surge in consumer prices. This issue places a huge economic challenge in-front of a world, already bruised with the scars of pandemic. Most of the countries began taking measures to control the inflation from the very beginning of this year.
The OECD CPI inflation rate for November was around 6%. USA saw the highest inflation among the developed nations. The reason cited by the US officials was, the disruptions in supply chains amid COVID outbreak has lead to rise in input rates, leading to the increase in consumer prices.
Also, during the pandemic, the consumers cut their spending on the services such as- hospitality, tourism, travelling, restaurants, entertainment etc. and ended up spending more on the goods, causing the inflation in prices of the goods. In the current scenario, sue to the lack of labour forces, the services inflation has picked up as well.
The Federal Reserve policymakers, began fighting the inflation rates from the month of December, 2021. They are going to cut back faster on their pandemic era stimulus at a time of rising prices and a string economic growth. This caps a difficult 12 month with a policy shift that would lead to higher interest rate in 2022.
According to the US Government, a large part of the current inflation rose due to the rise in demands. The more household savings and pay-check payments by the government lead to higher disposable income. This lead to higher demands of goods and services which in-turn increased the consumer price.
This hike in rate of interests to control the rise in inflation rates will have a negative impact on Indian markets. It might lead to Indian Rupee declining against US Dollars, and ousting of money from the market of India.
The key short-term risk would be the excessive rise in oil prices. As Oil nears $100/bbl, we should see near-term macro concerns about higher bond yields and weaker Indian Rupee (INR). This will force the RBI to increase sharply.
In fact, we would argue that even now India doesn't need extremely accommodative policy and the RBI should start normalizing rate hikes and liquidity withdrawals.
India as a whole is better positioned to withstand higher global interest rates. In our recent note, we think India is on track for a sustained economic recovery boost Global trade and exports, and the availability of global capital suggest that with any lucky and right policy, India's gross domestic product (GDP) growth can recover and growing at a faster rate than before the pandemic.
GDP growth of 6% by 6.5% with inflation above 5%, repo rate above 6% and 10-year bond yields above 7% . This is our 20-year average. So we don't understand why this shouldn't be true today.
Comments
Post a Comment