Analysts around the world are forecasting a recession following the Fed’s steepest interest rate hike in the last 3 decades. This coupled with signals of weak consumer spending and anticipation of future rate hikes may not bode well for the economy as the Federal Reserve is aggressive toward taming inflation.

There are some positive points as the US unemployment rate of the country is at 3.6% only, close to its half-century low as companies hire actively. However, the economy may suffer a recession despite steady income levels as the borrowing becomes costlier and the consumers decrease credit-led spending.

Wells Fargo & Co. has timed a mild recession for mid-2023 as inflation runs at a 40-year high. The Head of monetary policy at Moody’s Analytics said in a note, “The Federal Reserve is going to hike interest rates until policymakers break inflation, but the risk is that they also break the economy.” 

Central banks around the world including RBI lowered interest rates drastically to deal with the Covid-19-led subdued demand. Lower rates lead to increased borrowing which kept the demand stable and helped the countries to steer clear of the slowdown.

However, Russia’s invasion of Ukraine worsened the energy and food crises. Further, discontinuous lockdowns in China have caused supply-chain woes. 

But what implications can a recession have on the Indian stock market? The Rupee has depreciated 5.12% to ₹ 78.05 from ₹ 74.25 in January this year. Foreign investors took out ₹ 1.92 lakh crore in the initial five months of the year. This contrasts sharply with net investments of ₹ 25,752 crores for the whole of 2021.

In the aftermath of Covid, the money flew from the US to the energy markets like India as the US had near-zero interest rates. As the dollar gains and yields rise on US treasury bonds, the net interest rate margin would narrow between US and India. This can have a negative effect on the Indian debt and equity markets as investors will pull back funds.

Rumki Majumdar, an economist at Deloitte India commented, “As the Fed begins reducing its balance sheet size by halting the reinvestments of the proceeds of maturing bonds, this will have an impact on global liquidity and increase capital outflows from emerging nations. India may also see a decline in foreign investments, while borrowing costs turn expensive.”

Plus, it is a well-known fact that as markets fluctuate by the actions of foreign investors, retail investors panic and start selling securities as well. This further adds to the selling pressures and results in a sharper and protracted decline in markets.

Written by – Vikalp Mishra

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