- The benchmark
US Central bank rate now ranges from 5.25% to 5.50%, reaching its highest level since 2001. - Since this has not come as a surprise, the markets have already factored it in, and hence it is less likely to affect
RBI ’s monetary policy decisions, say analysts. - If the inflation turns around, it may challenge the ‘Goldilocks scenario’ and it will translate into high market volatility.
This rate hike is the 11th since the Federal Reserve began its fight against inflation in March 2022. Interestingly, it comes just one month after the central bank decided to pause rate increases in order to evaluate the state of the economy following the failures of three regional banks recently.
Says Abhishek Bisen, Head of Fixed Income & Fund Manager, Kotak Mahindra Asset Management Company, “The
The question is how the US
“I do not think it is going to impact RBI’s monetary policy stance because the impact typically happens when something unexpected happens. I think this was pretty much factored in by all market participants, and I am sure that the regulators also have baked it in. Fed has already communicated that they will have two more rate hikes and they have left room for one more rate hike,” says D K Joshi, Chief Economist, Crisil.
India does not necessarily need to increase rates because the Fed has raised rates. While the Fed has raised rates by 500 basis points in the last one year, the RBI has raised rates by only 250 basis points.
However, Sinha has a word of caution. “The market has been pricing in a Goldilocks scenario and the assumption is that we have rate cuts and quantitative easing is coming back. All kinds of assumptions have been priced in as far as the valuations are concerned. There may be an inflation surprise on the upside, because in the US consumer confidence and housing prices have rebounded.”
He adds that if inflation turns around, that will challenge the Goldilocks scenario and that will translate into high volatility in the markets.
The US inflation data is scheduled to come out next week and the street expects a softening in headline reading because of the relaxation in the goods markets, the resolution of supply chain bottlenecks, and the alleviation of the impact caused by the Russian-Ukraine war.
“In deciding whether to hike once more in September 2023 the Fed would critically examine the data on labour market conditions and the non-housing services inflation. At this juncture, it expresses a reasonable chance of one more hike,” says Dhanjay Sinha, Dhananjay Sinha, Head of Strategy Research and Chief Economist, Systematix Group.
Agrees Pankaj Pathak, Fund Manager- Fixed Income, Quantum Mutual Fund. “The rate hike suggests that future actions will be data dependent. If inflation moves above the Fed’s expectation, they will hike rates. If it remains on the expected declining path, the Fed will pause.”
According to US Federal Reserve Chair Jerome Powell, the tightening of monetary policy has had some disinflationary effects so far, but it has not resulted in a loss of employment. The unemployment rate remains at a historically low level of 3.6%. While the current tightening measures will need to continue, and additional rate hikes might be necessary, there is a low likelihood that achieving the inflation target will require a significant increase in the unemployment rate or disruptions in the labour market.
Therefore, it is unlikely that the economy will experience a significant contraction beyond the normal slowdown, leading to the base case assumption that the United States will avoid a recession.
Market participants are optimistic about a "Goldilocks" scenario, wherein policymakers successfully control inflation without significantly hampering economic growth. This approach also aims to maintain long-term interest rates at relatively low levels compared to historical standards, fostering a favourable and balanced economic environment.