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Business News/ Markets / Stock Markets/  Will US Fed hike rates in May? What would the decision mean Indian market?
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Will US Fed hike rates in May? What would the decision mean Indian market?

The US labour market still remains tight which is a solid signal that the Fed will stay on course of hiking rates at least in May. However, there are expectations that the US central bank will take a pause after that.

US CPI inflation eased further in March but it is still way above the Fed's target. (AFP)Premium
US CPI inflation eased further in March but it is still way above the Fed's target. (AFP)

The US Fed has been hiking policy rates since March 2022. This means that the federal funds rate has moved from near zero to the range of 4.75 per cent to 5 per cent in just one year.

The Fed is widely expected to hike rates further by 25 bps on May 3 as the US jobs market remains tight and inflation still remains at higher levels despite the easing of the last few months.

Fed's aggression has cooled off but its intent to combat inflation is well in place. And it appears the Fed is not done yet.

In fact, the Fed was expected to continue hiking rates till July but the banking crisis in the US has raised the possibility of a pause after the May hike.

Another 25 bps hike in May?

The US labour market still remains tight which is a solid signal that the Fed will stay on course of hiking rates at least in May.

As Reuters reported, the US unemployment rate was 3.5 per cent in March, signalling labour market resilience that will keep the Federal Reserve on track to raise interest rates one more time next month. Annual wage gains slowed but remained too high to be consistent with the US central bank's 2 per cent inflation target.

US CPI inflation eased further in March but it is still way above the Fed's target. The US consumer price index (CPI) rose 0.1 per cent in March and 5 per cent year-on-year.

Fed is expected to remain data-dependent on its move on rate hikes. For now, Fed appears to have space for at least one rate hike even though the market is concerned about a recession which might hit the US by the year-end.

"Whether Fed is likely to hike rates in May will depend on the inflation and GDP data expected this week. The disinflation process is likely to continue. The most likely outcome is a 25bp hike by Fed in May and then a pause," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Shrey Jain, Founder and CEO of SAS Online said the decision to potentially hike rates again in May would depend on a number of factors, including the evolution of economic and financial market conditions and the outlook for inflation.

"It is possible that the Fed may choose to raise interest rates by 25 bps at its next meeting in May," said Jain.

Sandeep Jain, MD of Trans Scan Securities also believes a 25 bps hike is coming in May.

"The macroeconomic data of the US and other factors like inflation, easing of concerns in the banking sector as well as strong jobs data indicate a higher chance of a rate hike. A near 70 -75 basis points rise in the US two-year treasury yields in the last month has also reduced the chance of a pause or rate cut," said Jain of Trans Scan Securities.

How will it impact the Indian market?

The May hike is unlikely to have a significant impact on the Indian market since it is already factored in.

However, the Indian stock market is sensitive to global events and the impact of a Fed rate hike on the Indian market can be complex.

Interest rate hikes in the US make US assets more attractive to investors which triggers a shift in investments from emerging markets to the US markets. So, interest rate hikes in the US are bad news for markets like India.

A negative surprise on the rate hike front will hit the foreign capital inflow and deteriorate market sentiment further which is already fragile due to unimpressive March quarter numbers and worries over global economic slowdown.

On the other hand, if the market gets hints of a pause, it will rally. As Vijayakumar says, "If the market thinks that there will be a pause after the 25 bp hike, the US market will rally. This will have a beneficial impact on Indian markets too."

But the hint may be ambiguous as the Fed members appear to be divided on their view on rate hikes.

"It appears there are differing views among Federal Reserve officials regarding the appropriate path of monetary policy. While some officials are advocating for a pause in rate hikes, others, such as Waller, Fed Governor, believe that the strong economic activity and high inflation warrant continued tightening of monetary policy," said Jain.

Jain of Trans Scan Securities is of the view that Fed’s decision to hike interest rates in May won’t have a major impact on our markets as the same seems to be already priced in. However, due to the shrinkage in rate differential between US and India, the currency trade will be impacted negatively. RBI may follow suit and raise rates to curtail the outflow of funds by FIIs and save the Indian rupee.

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

 

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Published: 26 Apr 2023, 08:33 AM IST
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