Does US Fed’s rate hike decision offer cues to RBI’s April policy?

In a first since 2018, the US Federal Reserve raised interest rates by 25 basis points to a target range of 0.25% to 0.5% on Wednesday. The Fed signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades. This comes even as risks to economic growth mount. The Fed also said it would begin allowing its $8.9 trillion balance sheet to shrink at a “coming meeting” without elaborating further. Stock markets, on their part, rallied globally as the rate hike was on expected lines.

Besides, Fed chair Jerome Powell’s confidence that the American economy was strong and well-positioned to handle tighter monetary policy boosted investor sentiment. The S&P BSE Sensex zoomed 1,047 points to end at 57,864 levels while the Nifty50 shut shop at 17,287, climbing 312 points. Both the indices advanced 2% each led by realty, financial, and metal stocks. However, analysts believe the US Fed’s hawkish stance doesn’t imply the RBI will hike rate in its April meeting as growth concerns linger. Mark Matthews of Julius Baer, too, believes the Federal Reserve’s 25 bps rate increase does put pressure on other central banks, including RBI. However, RBI has the reverse repo rate at its disposal, so it doesn’t need to raise the benchmark rate immediately. As regards equity markets, analysts believe global markets, including India, are hoping rising rates and de-escalation in the war will tame inflation. This, they say, will improve market sentiment but only in the second half of 2022. Overall, the near-term outlook remains volatile for the equity markets as the geopolitical situation remains fluid. Over the medium-term, the markets will eye macro-economic developments and rate hikes by the RBI, likely in the later half of CY22. Domestic markets are closed today on account of Holi.

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