InvestorQ : Do thing the Fed will hike rates more after US inflation data? Will the RBI also look to hike rates and what should it do?
Riya Dwivedi made post

Do thing the Fed will hike rates more after US inflation data? Will the RBI also look to hike rates and what should it do?

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shrinidhi Rajan answered.
1 month ago
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That is an interesting question. For now, the Fed stays its course. It has already hinted that it would hike the rates by 75 bps in November almost with an air of certainty. It is slightly more tentative on the December meeting and has indicated that it would be anywhere between 50 bps and 75 bps. That would take the repo rates to around 4.25% to 4.50% range, still well short of the terminal Fed rate target of 5% and above. The CME Fedwatch is already indicating a likely rate hike of 75 bps in November and another 75 bps in December.

However, there are indications that once the Fed hikes by another 125 bps in November and December 2022, there could some pause in the rate hike. Even the Fed would want to stand the side lines and ensure that the trickle down is really happening. Sitting here in India we must not miss the bigger picture. Fed has got the power of the dollar which has the exorbitant privilege of being the central currency of choice to global trade and commerce. The currency will always be in demand and as of now there are no alternatives. Fed can afford to stay hawkish for longer, since the dollar boost will bring huge dividends.

How is the RBI likely to react to the latest inflation numbers in the US and the tone of the Fed and the CME Fedwatch. RBI is almost in a sort of policy quandary for 2 reasons. Firstly, RBI needs to align with Fed on monetary policy to avoid the risk of monetary divergence. On the other hand, too much of tightness will impact growth and that is already evident in the weakening of IIP to negative zone. In India, it is not only IIP that dipped into negative, rupee has gone for a toss down to 82.40/$ and inflation is nowhere under control. RBI has to make a choice whether it wants to run with the hares or hunt with the hounds.

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