US FED HIKES RATES - CUE FOR RBI TOO?

For the 8^th time since 2015 and third time in 2018, the US Federal Reserve, as widely expected hiked interest rate by 25 bps, to a range between 2% and 2.25%. And it removed the reference to “accommodative policy.”

All eyes were also on what the Fed is likely to do next year – will it continue with its rate hikes or will it take it slow? Well, based on the Fed median, it continues to project three rate hikes in 2019. And in 2018, expectations are still high for another rate hike. December seems to be the favorite month to do so.

Despite Trump escalating tariff wars, this rate hike by the US Fed sends the message that the buoyancy in the US economy is here to stay; the Fed apparently does not expect the impact to be drastic.

By removing the “accommodative” stance from the policy statement, the Fed wants to convey that the interest rates have now moved much closer to the neutral level which neither boosts nor restrains the economy.

In the ensuing Press Conference, Powell made a very good opening statement, a reminder to all those who believe that central banks can change economies with their policy decisions alone. He said that the structural challenges facing the economy are beyond the Fed's capacity to address. Isn’t that true for our very own RBI too? Ultimately the onus is on the Govt and the decisions that it makes.

This rate hike cycle of the USA is in direct contrast with that of the European Central Bank, which said that it will continue to stick to its policy rate of -0.4%, at least till end of 2019 summer. Bank of Japan too has decided to stick with its current rates till 2020.

But for emerging markets, especially India, this luxury does not exist. The rising rates in USA will force the RBI to hike rates to protect the already battered currency, especially because we are staring hard at very large current account deficit.

Thus for the Indian markets, this rate hike does not bode well, more so because of the falling rupee and rising crude price. India has hiked import duties on 19 items in a bid to arrest the falling rupee. But this is unlikely to help; it will neither help support the rupee nor help bring down the current account deficit; iF anything, it might actually prove to be inflationary.

The Indian markets are expected to remain volatile and all eyes will now be on 5^th Oct, when RBI will announce its rate hike decision. For now, sugar stocks will beam ear-to-ear while aviation and diamond stocks will howl in pain.