Partner With Us NRI

What Does the US Fed's Biggest Rate Hike Mean?


When America sneezes, the rest of the world catches a flu. If you've noticed a sharp selloff in the stock market over the last two days, it is due to the US Federal Reserve's latest announcement on interest rates. The Fed, America’s central bank, hiked interest rates by 75 basis points or 0.75%. It was a policy response against consumer price inflation that hit a 40-year high.

The rate hike is the biggest in 28 years. The last time the Fed raised interest rates by 75 basis points was in November 1994. While the hike is what the market and experts expected, it still delivered a blow to stock markets worldwide. 

Why did the Federal Reserve hike interest rates? 

Financial markets were flooded with ‘easy’ money. Central banks pushed up liquidity in the financial system to tackle economic slowdowns. Cheap money meant better credit growth and faster economic growth. However, that does not work if the consumer price inflation soars. The era of ‘easy’ money is over.

Hiking interest rates is one of the most effective ways to curb inflation. Worldwide, inflation has been on a steep rise because of multiple factors. One is the Covid-19 pandemic, which wreaked havoc on supply chains and prices of goods globally. The Russia-Ukraine war is now exacerbating problems supply side problems.

The US is witnessing an inflation rate that is the highest in 40 years. The price of consumer goods has shot up, putting pressure on household budgets. And inflation does not seem to be slowing down. 

In a bid to control inflation, the Fed hiked interest rates steeply. When the central bank of a country increases interest rates, it makes borrowing more costly. As a result, people spend less. This reduces the demand for goods and services, eventually bringing down prices. 

How will it affect the Indian economy? 

Fed interest rate hikes are never good news for the Indian economy. We can expect negative consequences such as further currency depreciation and an inflationary situation. Here are some implications of the US Fed rate hike on the Indian economy: 

1. Tight financials 

A rising interest rate scenario in the US triggers a risk-off investment strategy. It strengthens the US dollar and assets denominated in that currency. As a result, emerging markets such as India will witness an outflow of foreign capital. India is already seeing foreign capital outflow, and the Fed's interest rate hike will only make it more pronounced. This means a tighter financial situation for India in the coming months. 

2. Weaker rupee 

As money flows out of the Indian economy and into the US, the American dollar will grow stronger against the rupee. As a result, we can expect the Indian rupee to depreciate. The rupee is already at an all-time low against the dollar, closing at 78.17 per dollar. We can expect a further strain on the value of the rupee. 

3. Rising inflation 

While the Federal Reserve's rate hike might be able to curb inflation in the US, the opposite is likely to happen in India. As the cost of imports becomes more expensive because of a weakening rupee, the price of goods in the country will shoot up. Expect a high inflationary scenario in the country. 

What should investors do? 

As such, while investing, you should be mindful of investments that will help you stay ahead of inflation. 

Stock market investments may not sound like a good idea as markets across the world tank, but history shows that long-term investment in strong companies can give returns good enough to comfortably beat inflation.

It may be a good idea to spend time on research and identify companies that can pass on high input costs to consumers. They tend to do better when inflation is high. Gold can also be a hedge against inflation. Consider investing in digital gold, RBI gold bonds and other instruments like exchange-traded funds. 

Additional read: How to Beat Inflation with Your Investment?

What is the rest of the world up to? 

Following the US's footsteps, the UK and Switzerland have also hiked interest rates. The UK has hiked interest rates by 25 basis points. Switzerland's interest rate hike from minus 0.75% to minus 0.25% is the first hike in 15 years.  

This means that countries worldwide are trying to tackle inflation and a global slowdown is around the corner. 

The Fed's interest rate hike in a bid to curb inflation can have severe consequences on the Indian economy. As an investor, you should focus on reducing your borrowings and investing in avenues that are a hedge against inflation. 

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code:-07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: complianceofficer@icicisecurities.com. Investment in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

Most Popular

  • 21 Jun 2022
  • ICICI Securities

Should you invest in Mutual Funds SIPs or FDs?

Choosing between a Systematic Investment Plan and a Fixed Deposit comes down to risk appetite and investment goal. Nevertheless, mutual fund SIP investments can be beneficial in many ways. This article will outline the difference between the two investment instruments and which one you should choose.

  • 21 Jun 2022
  • ICICI Securities

How to choose the best SIP investment?

Systematic Investment Plans (SIPs) are an option to make regular investments in mutual funds. Before heading to make an investment in SIP mutual funds, consider these factors to find the one that perfectly justifies your financial goals. 

  • 21 Jun 2022
  • ICICI Securities

How does long term capital gains tax impact you?

Certain assets, such as real estate and shares, attract long term capital gains (LTCG) tax. Here’s what you need to know about LTCG tax and how it can impact your finances.

  • 21 Jun 2022
  • ICICI Securities

Choosing between stock market and fixed deposit investments

Choosing the right investment option is critical for meeting personal financial goals. This article will highlight the difference between choosing stock market investments and fixed deposits—the aspects to consider, the risk-return profile, and what would fit into your portfolio.

  • 21 Jun 2022
  • ICICI Securities

Are Small-Cap funds good investments?

The best small-cap funds outperformed large-cap and mid-cap mutual funds last year. Now that the markets are turning bearish, is it a good idea to invest in small-cap mutual funds? Here’s an overview of these equity mutual funds to help you make an informed decision.

  • 17 Jun 2022
  • ICICI Securities

What Does the US Fed's Biggest Rate Hike Mean?

On 15th June 2022, the US Federal Reserve hiked interest rates by 75 basis points, the biggest hike since 1994. Why did it do so? What are its implications for India? Read on to find out more.

  • 15 Jun 2022
  • ICICI Securities

What is ESG investing and everything you need to know about it

In the last few years, since climate awareness and social justice have piqued people’s interest worldwide, ESG investment has increased. This article talks about ESG investing and the options available for ESG investment in India.

  • 15 Jun 2022
  • ICICI Securities

The Latest ESG Reporting and Framework in India

In May 2021, India introduced a new environment, social, and governance (ESG) guideline for the top 1,000 listed companies by market capitalisation. The Business Responsibility and Sustainability Report (BRSR) will be mandatory for these companies from FY 2022-23. Here’s what you should know about this ESG guideline.

  • 15 Jun 2022
  • ICICI Securities

Difference Between ESG and SRI Investing

When it comes to value investing, the two terms—ESG investing and SRI investing—are often confused. However, ESG investing strategies are different from SRI investing strategies. Read more to find out what sets the two apart and how you can decide which approach to adopt.

  • 14 Jun 2022
  • ICICI Securities

Four ways to ensure you leave your children a financial legacy

It is a moment of pride for parents to see their children earn their own money and lead a life with dignity. No words can express the joy to see your children grow, but how do you touch their life when you are gone? You can do that by leaving behind a financial legacy for your children to inherit. Here are four ways you can align your financial plan such that you leave behind something for your children.