InvestorQ : What were the major takeaways from the US Fed minutes and does it have any significance for Indian markets?
Niti Shenoi made post

What were the major takeaways from the US Fed minutes and does it have any significance for Indian markets?

ishika Banerjee answered.
3 months ago

One quick takeaway from the minutes of the US Fed announced earlier this week is that the rate hikes are coming sooner rather than later. On the one hand, the Fed has given a very hawkish view on inflation and also on interest rates. On the other hand, it has kept an escape route open if inflation was to fall sharply. Fed believes that inflation could taper and hence any view on rates beyond March would be on a case by case basis. Here is the gist.

a) Fed has hinted that the first rate hike could happen as early as March but avoided longer term guidance beyond March 2022. The idea is to stick to a data driven approach to rate action beyond March and take it up on a meeting-by-meeting basis only.

b) Fed is still quite confident that inflation would ease in 2022, although these hopes have been consistently belied in the past. Hence, the Fed has still kept a small escape route from hawkishness open, should inflation start tapering faster than expected.

c) There is another side to the Fed argument. If the inflation is still sticky, the Fed may use the double whammy of rate hikes and bond book unwinding. It may start an aggressive drawdown on the $9 trillion Fed bond book which would also tighten liquidity.

d) For now, the market consensus and the CME Fedwatch indications are that rate hikes could be more frequent than once a quarter. For now, 50 bps rate hike in March 2022 looks on the cards due to the negative gap between the Fed rate and rate of inflation.

What does this Fed story mean for Indian markets?

In a way, the Indian markets cannot be totally immune to the action in the US markets. So it will rub off on India, one way or the other. There are 3 likely effects on Indian market.

· Indian markets as well as the RBI has to be a bit more realistic and prepare for a 50 bps rate hike in March 2022. That is going to happen. Normally, the first rate hike induces a good deal of volatility in Indian bond markets and also equity and forex markets.

· The immediate worry for the government would be to see that the LIC IPO sails through. It is likely to open around the March Fed meeting. If the Fed ends up being more hawkish than anticipated most institutional investors are likely to get cautious on LIC.

· Finally, it is likely to help the RBI fine tune its strategy for the April meeting. The Fed minutes put a fairly large onus on RBI to plan rate hikes in April. If the Fed hikes 50 bps in March, it is inevitable for RBI to look at a rate hike in its April policy, or perhaps earlier.