Hawkish Decision by US Federal Reserve
As per our expectation US Federal Reserve has opted to hike the interest rates by 25 basis pointsto 0.75%, backed by the strong improvement in the employment data. At the same time, Fed also forecasted three future rate hike in 2017 as earlier it was forecasted two.The rate hike signaled a faster pace of increases in 2017 as the President DonaldTrump supervision takes over with promises to boost growth through tax cuts, job creation andinfrastructure spending.Fed sees the unemployment rate falling to 4.5% to 4.6% in upcoming year and will remain at this level. This would create an additional room for Fed to hike the fund rates.
Also the inflation is expected to rise up to 2% because the recent decline in the energy and import prices dissolve and labor market has shown a good come back. This move make FII’s to withdraw funds from emerging markets and put back in to the US markets as the dollar goes stronger on account of this rate hikes. The impacts of this move majorly will be on the emerging markets as the currency rates get depreciated against dollar.
FOMC’s forecast of gross domestic product growth is at 2.1 percent in 2017, 2percent in 2018 and 1.9 percent in 2019. Which we can see far below compares to the growth rate of major emerging economies like India, China.
The impact of rate hike by Janet Yellen on the Indian market would not be so curious, mostly because the Indian Government’s recent move to discontinue the old currency notes of Rs 500 andRs 1000. This move has already priced in the Indian equity markets.FII’s have already withdraw much fund on the demonetisation move from the Indian markets, as the move will impact the Indian economy slightly negative forshort term.