Explained: Fed move and Indian markets

What is the News?

The US Federal Reserve has announced that it would end its pandemic-era bond purchases and raise interest rates subsequently. Both these measures are aimed at taming inflation, currently at a four-decade high of around 7%.

This is likely to impact emerging market economies such as India.

How do US Fed actions impact India?

The outflow of Foreign Capital: When interest rates rise in the US, the gap between those and rates in countries such as India reduces, giving less incentive for foreign investors to pump money into overseas markets. This means foreign capital outflows can happen not only from equity but also from debt. 

Impact on Rupee: FPIs pulling money out of the equity and bond markets could weaken the rupee even as the dollar gets stronger with the rate hikes.

Highest Cost of Fund Mobilization from Overseas Markets: The rise in rates also means a higher cost of funds, and fund mobilization in overseas markets will be costly. The increase in the cost of funds may not only increase the cost of capital expenditure for India Inc and increase the cost of developing infrastructure for the government but will also strain the profit margins of companies.

Source: This post is based on the article ‘Explained: Fed move and Indian markets’ published in Indian Express on 28th January 2022.