As unlikely as it may sound, the decisions and actions of the United States Federal Reserve (US Fed), particularly regarding interest rates, have a significant impact on global markets, especially in emerging economies like India.
For instance, in one of the 2022 Fed Meetings, it was announced that the interest rates would be hiked up for the next quarter. Right after this announcement, both the Nifty and Sensex opened up with lowered numbers for a period of three consecutive days. This led to a sharp correction in the Indian equity market and resulted in a portfolio movement for many investors.
Join Jasna Jayan, a Research Analyst at Fi, as she delves into the basics of US Fed meetings, their typical agenda, and how interest rate announcements in the December meeting may shape the Indian economy and stock market.
The Federal Open Market Committee (FOMC) meets eight times annually.
During these sessions:
Read this article to learn more about the US Fed here.
The upcoming Federal Open Market Committee (FOMC) meeting is being held on December 12th-13th, 2023.
In the last Fed meeting that was held on 1st November 2023, the Fed maintained the status quo. It signalled that it could continue to raise rates at least one more time this year to bring down the overall inflation.
The Fed influences inflation by adjusting interest rates during its meetings. Raising rates can cool off the economy and reduce inflation while lowering rates can stimulate economic activity and boost inflation. The Fed's statements and guidance during these meetings also shape expectations, influencing market behaviour and economic decisions.
Between the last meeting in November and now, the US inflation data has come in at 3.2% - this is a game changer for the markets and is lower than what was expected. More importantly, core inflation increased only 0.2% on a month-on-month basis, which is also a positive sign.
The upcoming Fed meeting in December ‘23 is anticipated to be crucial and would mark an important day that several economists, investors and policymakers in India and the world are looking forward to.
Since the US Federal Reserve's primary concern was rising inflation, a decline in inflation will result in lower interest rates. While many experts are expecting the Fed to maintain its current interest rate target of 5.25%-5.50%, it is impossible to predict exactly what the US Fed will decide.
To understand how the Fed meeting will affect the Indian stock market, it is crucial to understand their interconnected relationship. India's growing economy is closely linked to the world markets.
If the trend of lower inflation clubbed with the potential drop in US interest rates continues, the Reserve Bank of India (RBI) may be compelled to consider softening interest rates in India, too, with investors' changing notions of where they're putting their money. Along with this, the overall macroeconomic conditions in India are currently favourable, given the following:
There is a chain reaction to the Fed's movement on interest rates in India. This,
For instance, in one of the 2022 Fed Meeting, when it was announced that the interest rates would be hiked up, both the Nifty and Sensex opened up with lowered numbers through a period of three consecutive days.
On the other hand, if the Fed takes a pause and signals that it is preparing for rate cuts in the subsequent policy meetings, the Indian market may see strong gains.
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