The US Federal Reserve meeting’s minutes have been released, which showed that all participants agreed to a 50-basis-point interest rate hike and laid out plans for aggressive policy tightening to begin in June. Foreign investment in India has been witnessing outflow for quite some time due to the interest rate hikes in the US, thus adversely affecting stock markets and the economy here.
In the biggest rate hike in 22 years to control inflation running at a 40-year high in the US, the Federal Reserve in its May 3-4 session approved a half percentage point hike. It also laid out a plan, starting in June, to reduce the central bank’s USD 9-trillion balance sheet consisting mostly of treasuries and mortgage-backed securities.
The rate-setting Federal Open Market Committee’s minutes of the meeting, released on May 25, stated: “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings.” FOMC members also indicated that a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook. Here’s how the US rate hike cycle is affecting India:
Impact on Stock Markets
India stock markets have been concerned about the impact of interest rate hikes by global central banks and global uncertainties on the Indian equity market. The rising interest rates in the US, as part of measures to bring down 40-year high inflation there, are prompting the foreign portfolio investors (FPIs) in the Indian markets to pull out funds and move to America.
FPIs remained net sellers for seven months to April 2022, withdrawing a massive net amount of over Rs 1.65 lakh crore from equities in India. After six months of selling spree, FPIs turned net investors in the first week of April due to correction in the markets and invested Rs 7,707 crore in the equities. However, the exodus of foreign funds continues in May with FPIs pulling out over Rs 35,000 crore so far this month.
The BSE benchmark index Sensex has declined 11.68 per cent to 54,101.8 points on May 26 during the day, compared with 61,259.96 points on October 20 last year. Apart from US rate hikes, the fall has also been attributed to multiple reasons like global uncertainties arising out of the Russia-Ukraine war and the rupee fall.
However, two experts that news18.com spoke to said strong retail and institutional participation here has moderated the impact of the US rate hike and will keep the domestic market from having severe impact.
Independent markets analyst Ambareesh Baliga said that during the US rate hike cycle, export-oriented information technology and pharmaceutical companies are expected to do well going forward.
Impact on Rupee
The tight monetary policy globally has also adversely affected the rupee. It recently it its all-time low of 77.72 against the US dollar due to the outflow of foreign investments led by global uncertainties arising out of a geopolitical crisis on the Russia-Ukraine war and tight monetary policy by US Federal Reserve.
“As expected, the monetary tightening by the US Fed has triggered a portfolio investment outflow. Till May 16, foreign portfolio investors had pulled out USD 21.2 billion from India. This, besides a higher import bill, has put sudden pressure on the Indian rupee and forex reserve,” India Ratings has said in its report.
Impact on Inflation Rate in India
The fall in the Indian rupee, mainly due to the outflow of foreign investments, is also making imported items costlier and stoking inflation in the country, which is already out of the RBI’s comfort zone of 2-6 per cent. Sectors such as fast-moving consumer goods (FMCG), metal and banking, among others, are at the receiving end. Retail inflation in India stood at an eight-year high of 7.79 per cent in April.
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