The US Federal Reserve (Fed) is the central bank of the United States. The Fed is responsible for setting monetary policy, including the interest rates that banks charge each other for short-term loans. Changes in these rates by the Fed significantly impact the Indian market and have global consequences.
The following table explains impact of Fed rate hike on Indian market:
Besides the interest rate, the Fed also reveals its monetary policy stance, categorised as either "hawkish" or "dovish." A hawkish stance indicates that the Fed is more likely to raise interest rates in the future, while a dovish stance indicates that the Fed is more likely to keep interest rates low.
The monetary policy stance of the Fed can also have an impact on the Indian market. A hawkish approach could result in the devaluation of the Indian rupee, as investors might transfer their funds out of India to find better returns in countries with higher interest rates, whereas a dovish approach could lead to the appreciation of the Indian rupee, as investors might channel their funds into India in pursuit of higher returns.
The following points summarise the key factors that determine the impact of Fed rate hike on Indian market:
Overall, US Fed rate impact on Indian market is a complex and dynamic issue. Investors and businesses should carefully monitor changes in US monetary policy and their potential impact on the Indian economy.
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US Fed rates affect the Indian market through exchange rates, capital flows, inflation, and economic growth.
US Fed rates affect India's capital flows, exchange rate, overseas finance, and monetary policy.
The sectors in the Indian market that are most sensitive to US Fed rate changes are those that are export-oriented, such as the IT and manufacturing sectors.
Investors in India typically respond to fluctuations in US Fed rates by adjusting their asset allocation. They use strategies like moving their money out of riskier assets, such as stocks and commodities, and into safer assets, such as bonds.
In 1994, the US Fed increased its interest rate from 3% to 6% in a year, leading to a worldwide bond market decline and rupee depreciation. India's existing economic challenges, like a balance of payments crisis and fiscal deficit, worsened due to the Fed's action. India raised the repo rate from 9% to 12% to stabilise the rupee and control inflation, impacting the economy's growth.