What’s the news?

The US Federal Reserve signals rate hike could be coming in the US, should Indian investors be concerned?

What does that mean?

The US Federal Reserve (US Fed) met last week and has kept the interest rates unchanged at a range of 0% to 0.25%. The Fed came out with an accommodative monetary policy and bond-buying programme, for now, to support the US economy. 

The US Fed also indicated that there could be rate hikes by 2023. It will continue its monthly $120 billion bond-buying program. They didn’t explicitly mention any timeline about tapering this aggressive bond-buying program.

The bond-buying program was unveiled during the depths of the economic downturn brought about by the Covid pandemic.

After the Fed’s signalling, stock market indices worldwide took a hit. Any interest rate increases in the US market will have an impact on currencies and stock markets in emerging economies. 

News of a hike in interest rate in the US could lead to an outflow of funds from emerging economies to the US. Emerging economies such as India have witnessed record foreign portfolio investments last year.  

This has, in turn, boosted equity markets. In June 2021, FPIs invested Rs 17,945 Cr, so far, in Equity.  There may be a slowdown in the pace of inflow in the upcoming months. The rupee is also expected to come under pressure as the dollar strengthens.

Capital seeks returns and when safe havens like the US Government Securities begin to offer higher returns, it is natural for some reverse flows to begin. While RBI is unlikely to change the policy rate anytime soon, it remains to be seen how it responds to developments around the world on interest rates.

How does it impact your wealth?

The increase in the rate of vaccinations is a positive sign and it needs to be seen if the country can sustain this pace. From a short-term perspective, the timing and pace of the US rate hike will impact the Indian equity market which may see an outflow of funds following the announcement.

It won’t be a big negative for the Indian market if the economy rebounds well and domestic consumption comes back strong.