US Fed meeting Impact on Indian markets

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US Fed meeting Impact

The US Federal Reserve (Fed) meeting on September 20, 2023, was a closely watched event by investors and economists worldwide. The Fed's decisions on interest rates and other monetary policy tools can significantly impact global financial markets, including the Indian economy.

In this blog post, we will summarize the key highlights of the US Fed meeting and discuss its likely impact on the Indian economy.

Understanding the relationship between the US Fed and the Indian economy

To understand how the US Fed Meeting affects India, we need to see how the two are connected. India's economy is closely tied to the world's markets. So, when the US changes its interest rates, it can shake things up for India. The US Fed's choices about things like interest rates can change how investors feel and where they put their money, which can then impact India's economy.

Key Decisions from the Fed Meeting and Impact on India 

The Federal Open Market Committee (FOMC) maintained the interest rate at 5.25%-5.50%, after raising it by 525 basis points since March 2022. The ongoing high-interest rate impacts not only India but also markets worldwide. Foreign investors might pull their money out of Indian markets because they see options like US 10-year treasury bonds as more profitable with less risk. 

An increase in interest rates leads to higher returns from US bond yields. 2-year Treasury yields hit their top level since 2006, and stock prices dropped after the Federal Reserve hinted at extended periods of higher interest rates, even though they made no changes on Wednesday.

For three consecutive days, both the nifty and Sensex have started with lower numbers, mainly because of sales from foreign institutional investors. There's a reverse connection between the stock market and US treasury bonds. When interest rates go up, these foreign investors often pull their money out of stocks and put it into US treasury bonds. To understand why this happens, click here.
While long-term foreign investors may not be overly concerned about slight rate hikes, short-term ones are more likely to step back. The market's fluctuations and a falling rupee require these investors to safeguard their investments, which can decrease their earnings.
The US dollar index went up by 0.09% to 105.21 after initially falling to 104.66. The Dollar Index is a tool that shows how strong the U.S. dollar is compared to a group of other important currencies. It works by looking at the average exchange rates of six different currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

This suggests the Indian rupee is getting weaker against the dollar. As a result, things might become more expensive in India. The dollar has been consistently going up for the past few weeks, marking its longest rise in a decade, mainly because of growth in the US.

Key Takeaways:

  • The Fed maintained interest rates at 5.25%-5.50% but hinted at further hikes in the future.
  • Higher US interest rates could lead to foreign investors pulling money out of India, weakening the rupee and making imports more expensive.
  • US bond yields are rising, making them more attractive to foreign investors than Indian stocks.
  • Short-term foreign investors may be more likely to sell their Indian stocks due to the market's volatility and the falling rupee.
  • The US dollar index is rising, suggesting that the rupee is getting weaker against the dollar.