US interest rates & the Indian market

low-interest-rate regimes and ample amounts of liquidity have taken global equity markets to new highs in the last one year. but going forward, that may change.

earlier in December, the US Federal Reserve Chair Jerome Powell said that there will be three 25 basis points (bps) interest rate hikes in 2022 as the economy “no longer needs increasing amounts of policy support”.

this comes after the rampant rise of inflation in 2021. the US Fed had earlier stated that the rate of inflation will be transitory, but recent data suggest that the elevated levels of inflation might be more persistent than earlier expectations.

a 25 bps increase thrice in a year might seem little at first, but even the slightest rise and fall in the interest rate in the US has implications across the world. especially in emerging markets like India.

the Fed also said that it will double the pace of tapering, the pace at which it reduces the purchase of Treasury bonds and mortgage-backed securities.

the liquidity tap is going to dry up as the Fed turns hawkish.

impact on emerging markets

as the US raises rates, foreign institutional investors (FIIs) are most likely to move from emerging market equities and bonds.

rising rates will make US Treasury yields more attractive, which will make FIIs move funds from India. higher rates will also make the Indian Rupee weaker in comparison to the US Dollar, which means they’ll net lower returns on their investments.

if foreign funds start withdrawing from Indian government securities, then the Reserve Bank of India (RBI) might raise interest rates as well to stop the outflow of funds from the domestic bond market.

a report by Moneycontrol says that in December alone, the FIIs have net sold over Rs 26,000 crore in the cash market, the highest monthly selling this year. on December 17 itself, they net sold Rs 2,069 crore in the cash market, the report said.

it is safe to say that the days of dirt-cheap interest rates are over and it will have a wide-ranging impact on the global economy and markets. we might see a period of either price correction or time correction during 2022.