FED MOVES, WILL RBI MOVE TOO?

There was no rate hike but looks like there is an end to “as long as it takes” mode.

The US Federal Reserve yesterday night said that it expected to raise interest rates by late 2023, which is much sooner than previously projected for 2024, following the recent inflation spurt and the economic recovery; plus with vaccination helping to keep a lid on the pandemic, employment too picking up, looks like all the boxes put out by the Fed were ticked for a rate hike.

The Fed’s median projection showed that it anticipates lifting the benchmark rate to 0.6% from the near zero by end of 2023. This is a change from the stance of earlier, where the Fed had expected to keep the rates status quo through 2023.

Well, the Fed expects not just one rate hike but two increases by end of 2023. And it expects to continue asset purchases at a $120 billion monthly pace until “substantial further progress” had been made on employment and inflation.

Following this, the US dollar strengthened, stocks declined and yields on 10-year Treasuries jumped.

The Fed has finally set the ball rolling. This rate hike will come months later, avoiding any rapid shifts, giving enough time for markets around the world to accept the change, helping avert any major shifts and shocks that could damage the fragile recovery.

For us here, it is sure to make RBI ponder – it is sitting tight on the rates despite the inflation screaming for a rate hike as the pandemic is still looking like a joker in the box – open it up and it will come back at us. But right now, it cannot. The economy is brittle and hurting and RBI needs to work around it.

As such also, tinkering with the interest rate is not like a magic wand; its not like as though there is super-duper demand when the rates are currently so low. What we need is beyond rates. We need to perk up demand while clearing the supply bottlenecks.

Unemployment is the big elephant in the room which the Govt is pretending does not exist. As per Pew Research, more than 3 crore Indians have lost their jobs and 7.5 crore have slipped back into poverty. CARE Ratings has put out a report which says that corporate India did not add any new jobs in the last five years, though it added significantly to sales and profits. Even RBI’s latest report on consumer confidence says more than 80% of Indians feel that job opportunities will decline.

What we urgently need is an urban employment which will provide at least 100 days of employment for every urban citizen, something like a MNREGA. This is the most important thing, the best ‘stimulus’ in the right sense that it can provide.

So, lets look beyond interest rates – be it the Fed or the RBI.