- The two-day (March 15-16) US Federal Open Market Committee (FOMC) meeting starts late tonight’s Indian standard time.
- The USA’s inflation has spiked to 7.9%, the highest since 1982 and the Fed will have to control it with limited fallout on its economy.
- Global markets might be affected by the Fed’s move amid the ongoing Russia Ukraine conflict.
Indian Stock markets are on an edge, with the US Federal reserve considering raising key interest rates during its meeting on 15th March 2022. Investors and market participants all across the globe will keep an eye on what is to materialize at the US Federal Open Market Committee (FOMC) meeting that starts late tonight’s Indian standard time.
This two-day meeting (March 15-16) will determine the magnitude of the first-rate hike by the Fed in three years. When Covid-19 became a pandemic, the US fed had lowered interest rates and had kept markets awash in liquidity.
The world’s largest economy, the USA is in the clutches of inflation that has spiked to 7.9% in February 2022, a 40 year high since 1982. The central bank is confronted with controlling it and limiting fallout on its economy. The central bank has no choice but to act.
How are the Indian Markets affected by the upcoming US Fed meeting?
The Indian Stock markets remained in the green during the last four trading sessions. They were marginally high, even on Tuesday’s early trade, after which they plummeted. The Sensex closed at 55,776.85 points, down by 1.26% or 709.17 points, while the Nifty closed at 16,663.00 points, down by 1.23% or 208.30 points.
According to experts, global Inflation levels, including India, could rise further in March, even if on a temporary basis as ceasefire talks between Russia and Ukraine failed to make any headway.
Amish Mehta, managing director and chief executive, CRISIL Ltd. said “A spike in commodity prices, especially of crude oil, will have a bearing on India’s macros, including the current account deficit and inflation. These would create headwinds to growth.”
Usually, a $10 rise in crude oil prices increases the current account deficit to gross domestic product (GDP) ratio for India by about 40 basis points. One basis point (bps or bips) is equivalent to 0.01% or 0.0001 in value.
What are analysts saying?
Deepak Jasani, said, “Markets anticipate a 25 basis point rise at this meeting, but pricing has risen to indicate a 70% chance of a larger 50 basis point hike at its subsequent meeting in May, due to concerns about inflation.”
“The US Fed could raise rates four to seven times in the next year or two to curb economic growth depending on the evolving situation. The US Fed has never raised rates with the yield curve this flat and volatility so high,” he added.
Prasenjit K Basu, Chief Economist, ICICI Securities said that the Fed would aggressively raise interest rates this year, starting at the March FOMC meeting, and will be obliged to raise the Fed Funds rate at every one of its remaining meetings this year.
Effectively, this will take the target Fed Funds rate to 1.75% by the end of 2022 – implying there will be at least one hike of 37.5 bps to normalise the rate, he added.
Sunny Agrawal, deputy vice president of SBI Securities said, “Globally, economies have barely begun post-pandemic recovery and have to face the challenge of the inflation bogey.”
“By the end of CY22, one can expect US 10-year bond yields to inch up toward 2.75 to 3.00 per cent and we may see globally money shifting out of bond portfolios and moving towards equity,” he added.
Nishit Master, portfolio manager at Axis Securities said, “Markets will look for any indication/timelines by FOMC to pare its existing bond holdings after asset purchases end by this month’s end.”
Heated Supply Chain
The USA prompted sanctions on Russia after it invaded Ukraine on February 24, 2022, and this might disrupt the global supply chain of various commodities.
Arun Malhotra, Founder, CapGrow Capital Advisors said, “The supply-side disruptions, the recent surge in oil prices is going to have an impact on the prices in the short to medium term.”
Brett Ryan, senior US economist at Deutsche Bank told Reuters said, “If we have persistent disruption to energy and food supplies, that’s going to put upward pressure on inflation. That … means consumers will have less income to spend on other goods and services, and that typically is what slows the economy and presents recession risks.”
