The Dow Jones Industrial index in the US fell 0.77% and treasury yields rose on Wednesday after the Federal Reserve indicated that there could be two rate hikes by 2023.
While it remains to be seen how the RBI responds, market participants feel that if inflation comes alongside a rebound in the economy, it should not be a big concern for investors.
In a deviation from what it said in March, the Fed signalled that there could be at least two rate hikes by 2023 as economic activity indicators have strengthened and inflation has firmed up.
In its statement on Wednesday, the Fed said it “is committed to using its full range of tools to support the U.S.
After the Fed’s signalling, the Dow Jones Industrial fell 265 points and the treasury yield rose from 1.498% on Tuesday to 1.569% on Wednesday.
News of a hike in interest rate in the US leads not only to an outflow of funds from equities into US treasury bonds, but also to an outflow of funds from emerging economies to the US.
Some of the items that pushed retail inflation were fuel, which recorded inflation of 11.6% , transport and communication at 12.6%, edible oil at 30.8% and pulses at 9.3%.
In India, an ebbing of the second wave of the pandemic and increasing vaccination numbers have led to expectations of a recovery in demand, and higher raw material prices.
While RBI is unlikely to change its accommodative stance or the policy rate anytime soon, it remains to be seen how it responds to developments around the world on interest rates.
If global liquidity flow has boosted Indian markets over the last one year, experts say the rise in interest rates in the US and tapering of the monthly bond buying programme may impact stock market movement.
The recovery level of the Indian economy at the time RBI hikes rates rate — which may still be some time away — will be critical.
While the US will give advance warning before raising rates and tapering of the bond purchase programme, even in India RBI is looking to ignore inflation for some period of time.