One of India’s top bankers warns of volatile times ahead in the markets ⁠— stocks, cryptos, bonds et al

• A top banker from India, Uday Kotak, has warned that markets are likely to be even more volatile going forward.
• India’s bond yields had already hit a two-year high before the US Fed made its statement on Wednesday.
• Lower the price of the bond, higher the yield.

After the US Central Bank said that interest rates will start rising from March 2022 because inflation in America is at a 40-year high, a top banker from India, Uday Kotak, has warned that markets are likely to be even more volatile going forward.

Indian benchmark equity index, Nifty50, have already lost over 7% in the last ten days (since Jan 17) and the sell-off has intensified after the US Federal Reserve Chief Jerome Powell used the word ‘nimble’, instead of ‘gradual’ that he has used so far, to describe oncoming rate hikes.

“Investors, issuers, borrowers to brace up for volatile times,” Kotak, chief executive officer at Kotak Mahindra Bank said in a tweet on Jan 27 morning.

Not just stocks, even the bond market may get hit. India’s bond yields had already hit a two-year high before the US Fed made its statement on Wednesday.

Lower the price of the bond, higher the yield. When the yield goes up, it shows that the bond ⁠is worth less. That would mean the Indian government’s borrowing cost will also go up leaving less on the table for spending on boosting the local economy.

India’s Finance Minister Nirmala Sitharaman will have to factor this in while presenting the annual budget on February 1.

Why are the markets spooked?

Earlier, the Fed had indicated, and the markets had prepared for three interest rate hikes in 2022, but now it seems that the rate hikes would be faster than it previously estimated.

Faster rate hikes in the US will mean that the US dollar will gain faster against other currencies including the rupee. If the dollar is expected to get stronger, foreign portfolio investors are expected to pull more money out of emerging markets like India.

The risk appetite for investors will go down further and that would affect all risky assets like equities, cryptocurrencies like Ethereum, Solana and Cardano, all of which have lost more than a quarter of their value in the last seven days.

A stronger dollar will also mean weaker emerging market currencies including the rupee.

A weaker rupee will lead to outflows of dollars in India and cost of crude oil and other imported essentials will go up for Indians. The price of Brent Crude, which is most of what India imports, has already hit $90 a barrel before cooling off a bit.

SEE ALSO:
Ten points explaining what the US Fed said and how it affects India
The Fed hints it will soon raise interest rates as inflation lingers at its highest level since 1982