For the first time since 2018, the US Fed finally hiked interest rates to try and start taming inflation, which has become the biggest monster gobbling up the economy. With its annual inflation being at a 40-year high, this rate hike came as no surprise. Infact, all would have been shocked if the rates had not been increased this time around.
The Fed raised interest rates by a quarter percentage point and signaled six more such hikes this year. The Fed in its statement, said, inflation has been high due to broader price pressures and added that the war in Ukraine and related events are likely to create additional upward pressure on inflation.
The environment could not have been more challenging. Apart from Covid and supply disruptions, a tight labour market, Russia -Ukraine war and inflation too; there is a lot to contend with. And mind you, this is not just a situation for USA; its ditto for India too. With Fed hiking rates, the signal sent across the world is that its time to reverse the cycle. The RBI’s MPC, which is scheduled to meet between 6 - 8th of April, can now tow the line as the Indian economy too is reeling under inflation.
A rate hike in the USA means initially there will be more flight of capital from the emerging markets like India. FIIs have been on a selling spree and this will only go up further. The reaction is to pull out money from our markets and put it back in the USA for safer and more secure returns. And when FIIs pull out, there is more downward pressure on the Indian rupee and to prevent major depreciation, RBI will have to hike rates and prevent ‘imported inflation’ for India.
Thus in the short term we are bound to see more volatility as the markets world over will adjust to this rate reversal. IT stocks and all those with major exports to USA like pharma are bound to see action on their counters today.
That’s the short-term reaction but once the dust settles, FIIs will all come flocking back; that’s how it has been in the past and this time too, it will be no different.
As an investor one can stay calm and pick up value stocks for the long term. We need to understand that these are excruciating times, the pandemic and now this war; it’s a strong recipe for disaster. But we are still holding out steed and hopefully, through sheer domestic power, we will be able to withstand these trying times.