FED Rate hike and its Impact on India

Published 28-07-2022, 01:36 pm

FED announced interest rate hike on expected lines

The Federal Reserve hiked its rate on 27th July by another 75 basis points following a 50 bps and 75 bps hiked earlier this year. This interest rate hike was widely expected and is being carried out as part of the monetary tightening program following record-high inflation in the country. The US reported inflation at 9.1% in June, a 40-year high. Fed has already raised its fund rate target from 0% to 2.25-2.5% in order to curb inflation. This fund rate is the interest rate that US banks charge each other for overnight loans. All these efforts are being made to bring the long-term inflation rate back to 2%. 



How is it going to impact India?

1.Capital flow woes may continue

Already India’s foreign reserves are already about $580-590 billion down from its lifetime high of $632 billion. After the increase in the Fed rate, foreign capital flows into India could be further impacted which could further put pressure on the already depreciating Rupee.

2. Widening Deficit

The rupee deficit has caused a twin deficit problem of high fiscal and current account deficits in India. High commodity prices in the first half of 2022 have further deteriorated the foreign currency situation of the country as India is a major importer of several commodities like crude oil, Palm Oil, etc. The latest hike in the Fed rate will further improve the US treasury yields causing more money outflows from Rupee investments to Dollar. 

3. Consumers and corporates in difficulty

Indians are themselves reeling under high inflation rates which are still above RBI’s comfort band of 4-6%. Corporates too have reported a dip in margins in quarter 1 of FY23 due to high commodity prices which are primary sources of raw materials. Any Rupee depreciation from current levels could further impact inflation levels as the cost of essential imported items like crude oil could rise. 

What should an investor do?

Global uncertainties are very difficult to preempt. A practical piece of advice for long-term investors should be to focus on the developments around the companies that they are invested in rather than tracking the global markets too much. 

Most economists worldwide realize that inflation currently is a bigger menace to tackle than growth. India itself is expected to announce rate hikes early next month to bring down inflation to more comfortable levels. Several experts have estimated that inflation in most countries worldwide has peaked and should start cooling off in the latter half of this year. That being said, it is difficult to predict the exact trajectory of these global developments for ordinary investors. 

During these uncertain times, investors are generally surrounded by thousands of advice on how to change their investment strategy and which stocks and other financial instruments should be diverting their hard-earned money. 

We have only a few SIMPLE and TIME-TESTED suggestions to tackle this or any other global or domestic uncertainties.

  1. DO NOT stop your Mutual Fund SIPs, do not unnecessarily time the market. It has been observed in the last few months that people have stopped their SIPs due to volatility and uncertainty in the markets. This is instead a very good time to continue with the SIPs and benefit from buying in dips and following Rupee Cost Averaging. 
  2. Do not forget theFUNDAMENTAL rules when investing in stocks. Ensure you invest in only good quality stocks with healthy cash flows, strong ROE, ROCE, long-term sustainability, and able management. ALWAYS ensure there is a maximum margin of safety. 
  3. Apart from SIPs, one can also go for the lump sum mode of investing in good stocks and mutual funds during deep drawdowns
  4. Always consult Sebi Registered Investment Adviser (RIA) before investing and refrain from acting on unsolicited advice from tips and social media
  5. Avoid F&O and avoid leverage during high volatile markets unless your core profession is trading

Disclaimer: This blog is only for educational purposes and one must consult an investment advisor before investing.

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