How the US Fed policy may impact Nifty and the rupee

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Pushing the Nifty to fresh 52-week lows, the US Federal Reserve raised its benchmark interest rate by 75-basis points, the most significant hike in 28 years, to control rising inflationary pressure.

This recent hike has closely arrived on the back of the 50-bps rate hike in May and 25-bps in March. From March to date, the Fed has already seen a 150-bps rate hike. So, within four months – March, April, May and June, the Fed has accelerated the rate hike.

Jerome Powell believes the American economy is strong and well-positioned to handle quantitative tightening. He also believes that consumers are financially in good shape and spending but admits that consumer confidence is low due to higher gas prices and lower stock prices. However, he does not see a broad slowdown.

Possible Outcomes in the Future
We believe there is a fair possibility that the US economy will do a hard landing. We also believe that in the next Fed meeting on July 26th and 27th, there could be another 75 basis point rate hike. However, we think it will be challenging to control inflation.

Consider it like toothpaste – once out, it is almost impossible to put it back in. Global central banks will find it difficult, just like the Fed has realized that it is behind the curve. While they announced the 75-bps hike, there was another possibility that they could have told a 100-bps hike, but they did not do it.

This is a global issue evident across the world.

Agencies

As seen above, inflation rates are heightened in the US, UK, and the EU. There are likely to be four more rate hikes in the future. In my opinion, I predict here’s how the rate hike could proceed going forward.

fed col2Agencies

In other words, I am expecting another 175-bps rate hike from the Fed in the next four meetings in 2022. We will need to brace for more volatility in the days to come.

How Does This All Impact the Rupee?

What we have realized is that it is all very counterintuitive. Whenever the Fed rate has increased, the rupee has remained stable. Take the table below, for instance:

fed col3Agencies

Logically, when the interest rate rises, the rupee should depreciate severely. However, that has not happened. Hence, this gives us an idea that it is not necessary for a significant depreciation in the rupee when the interest rate goes up. But we do believe the rupee is likely to go up to Rs 80 by August 2022.

The Way Forward

Whenever the Fed has hiked rates from 2004 to 2006, Indian indices went up by 121 per cent. A similar thing happened from December 2015 to 2018, when rates were gradually hiked, and Sensex witnessed an appreciation of 38 per cent.

Nifty is edging close to 15,000, and we believe there will be some volatility in the near term. Every rise in domestic indices will meet strong resistance, and the market will remain choppy. We might see some recovery after the second quarter of FY23; however, owing to the macro concerns, the outlook continues to remain gloomy.

In all this, I would advise you not to get carried away by emotions on market volatility. Follow the advice of expert advisors and even if it means booking losses, adhere to their advice to ensure your wealth creation journey is on track.

(Sunil Damania is the Chief Investment Officer at MarketsMojo)



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