US Fed Interest Rate Impact on Indian Stock Market: The US Federal Reserve on Wednesday, September 20, retained the benchmark overnight interest rate in the range of 5.25-5.50 per cent. The US central bank, however, signalled the likelihood of another hike this year to fight inflation.
The key interest rates, which were raised for the 11th time in July by 25 basis points (bps) to 5.25-5.50 per cent, are at the highest level since 2001.
“The (FOMC) Committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 per cent. The Committee will continue to assess additional information and its implications for monetary policy,” the US Federal Reserve said in a statement.
It said recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
“The US banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks,” the US Fed stated.
What Will Be Its Impact On Indian Equity Market?
Rohit Arora, CEO and co-founder, Biz2Credit and Biz2X, said, “As expected, the US Fed kept a hold on the interest rates while signaling another rate hike of 25 bps before the end of the year. The major policy is that Fed indicated that interest rates will remain higher for longer than expected. Based on Fed’s guidance the markets should not expect any rate cuts for first half of the year while interest rates will remain much higher next year even as inflation keeps coming down.”
He added that the US Fed also doubled the GDP growth rate for this year as well as lowered the expected unemployment rate. This means that interest rates will remain higher for longer even if inflation comes down. This means that debt will remain most expensive for longer period of time.
Anita Gandhi, whole-time director and head (institutional business) at Arihant Capital, said the market’s reaction on Thursday will be driven by the US Fed’s commentary rather than the rate decision, which has already been factored in. “Investors need to monitor the Fed’s outlook for insights into future monetary policies and their potential impact on various sectors and asset classes.”
On Wednesday, benchmark indices BSE Sensex and NSE Nifty fell about 796 points or over 1 per cent to 66,800.84, due to heavy selling in banking and oil stocks in tandem with weak global trends ahead of the US Federal Reserve’s interest rate decision. The NSE Nifty declined 231.90 points or 1.15 per cent to end below the 20,000 mark at 19,901.40.
The rupee, however, rebounded 23 paise to close at 83.09 (provisional) against the US dollar.
The US Federal Reserve’s Full Statement:
Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated.
The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 per cent over the longer run. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 per cent. The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 per cent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 per cent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.