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US Fed rate hike
The long-awaited rate hike by US Federal Reserve is finally became true, with the Fed Chairman Janet Yellen raising the key rates by a quarter-point to a range of 0.25 per cent.
The long-awaited rate hike by US Federal Reserve is finally became true, with the Fed Chairman Janet Yellen raising the key rates by a quarter-point to a range of 0.25 per cent. Federal funds rate is the interest rate at which one bank lends funds to banks on an overnight basis.
It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans. When demand weakens and there's a recession, the Fed can temporarily stimulate the economy and help push it back toward its long-run output level by lowering interest rates.
While Fed kept its promise that the rate hike may be a quarter of a percentage point, up from close to zero, the move is significant. Fed raised interest rates in mid-2006, later it lowered rates and kept it close to zero for a long period, since 2007, when the country entered financial crisis led to crash of Wall Street.
Then, the Fed assumed that the economic activity is getting boosted hence the rate hike, though lower. The main assumption would be that when the rates are lower people borrow and spend more. Now, with the economy is showing strength and unemployment nearing 5 per cent, very close to inflationary pressure. In fact, there is no inflation and small raise in the interest rate may help to raise the inflation.
Then how will it affect Indian markets? The analysts are of opinion that the investors will slowly fly from Indian markets in the coming months and years, it means, the stock markets will start tumbling. For instance, the FIIs have already withdrawn about Rs 14,000 crore from stock markets.
Further the demand for dollar currency will increase as investors get better returns, hence dollar will strengthen, and rupee will fall. It eventually reduces foreign exchange reserves as RBI will start selling the dollar to arrest rupee fall. As of now, India is in comfortable place in terms of foreign exchange reserves of over $ 350 billion.
Interestingly, even Nasscom is apprehensive about the startup funding as the rate hike will make developed markets more attractive and will likely be less interested in the Indian startup ecosystem.
However, some economists say that all these apprehensions are exaggerated and emerging markets including India has already factored the rate hike in their economic plans. Who is right will be known in the coming months.
