The Indian markets ended in the red – more because it is always a ritual to fall on the eve of the US Fed meet. Though a rate hike was well factored in – the question was whether it will be 75 bps or 100 bps and 75 bps it was!
Already named as a “supersized” rate hike, the Fed rate hike of 75 bps to 3 – 3.25%, a rate last seen in 2008, was very much in line with expectations. There was collective sigh of relief almost all across the world. Along with the massive rate increases, Fed officials signalled the intention of continuing to hike until the funds level hits a “terminal rate,” or end point of 4.6% in 2023.
August inflation rose sharply by 8.3% and that more or less sealed the fate of interest rates – it had to go up to tame inflation. The Fed tonight also sent out the message that more rate hikes are in the offing; rates are likely to go up to 4.40% by Dec’22 and rising further to 4.60% in 2023; clearly no rate cuts till 2024.
Immediately after the rate hike, US stocks fell but not crashed. Bond yields rose and US dollar was at a 20-year high in the world currency basket.
Well, its very easy to sit in the cosy comfort of our drawing room and say that Powell, with his aggressive rate hike and hawkish stance is ushering in a recession. But then look at this the other way – if Powell sits on his hands despite the runaway inflation, won’t that be more disastrous than a recession which is a result of fighting inflation? Whatever needs to be done, needs to be done.
Next Friday, we have the RBI’s MPC meet and here in India too, the fight against inflation is pretty real. Here too, the necessary thing to do would be to hike rates but then the growing consensus is that RBI might prefer to take a pause now and wait for monsoon to show its impact on the harvest. Also being the festival season, RBI might not want to dampen the moods this month. Food prices remain high but have come off the highs of earlier months. But the patchy and uneven rainfall, impacting wheat and rice production, the staple of people across the country, might force RBI to do a rethink.
The markets might shrug off this rate hike by US Fed and move on ahead; FIIs usually take a small pause and then stock up again. So, this rate hike was expected and is not going to lead to a situation where the FIIs will scamper away. In this month of Sept, till yesterday, FIIs have been net buyers to the tune of Rs.2963 crore while DIIs have been net sellers at Rs.2431 crore. Starting August, FIIs have come back with a big bang – they bought equities worth net over Rs.22,000 crore in Aug alone - the first month after a year when we saw FIIs buying and we do not see that ebbing with this rate hike.
As we said earlier, it will be news-based and company specific action on the Street but with festive fervour about to hit a new high in the coming days, demand is expected to stay intact and mood upbeat.
Ganpati bappa has gone and now the Goddesses are waiting to come, along with India Inc we hope this turns out to be a great season. Let the festivities rule the moods and not the central banks!