Global stock markets went for a free fall on June 16 after the US Federal Reserve hiked interest rates by a larger-than-expected 75 basis points (bps) in a bid to contain inflation. One basis point is one-hundredth of a percentage point. Inflation has reached a four-decade high of 8.6 per cent in the US, spreading to more areas of the economy and showing no signs of abatement.
The rate increase by the US Fed was the single sharpest hike in 28 years and took the central rate to 1.6 per cent. The Fed could raise rates again by 50 basis points or more in its next meeting due July 27. Jerome Powell, the Fed governor, said that the central bank has tools, and the ‘resolve’ to bring inflation down. “I do not expect moves of this size to be common, but an increase of 0.5 or 0.75 percentage points is likely at [the] next meeting,” Powell said.
Several other central banks across the world continued with their rate hikes to rein in inflation that threatened to spin out of control as crude oil prices remained sticky at high levels ever since the Ukraine war and the ensuing sanctions on Russia. Crude prices were trading at $120.3 a barrel for Brent crude on June 17. The Swiss National Bank raised the policy rate by 50 bps for the first time in 15 years. The Bank of England also went for its fifth straight rate hike of 25 bps, the highest level in the past 13 years, on account of inflation reigning at its 40-year high.
The Reserve Bank of India (RBI) recently raised the repo rate by 50 basis points (half a percentage point), taking it to 4.90 per cent. Repo rate is the rate at which the RBI lends to commercial banks. The central bank had raised rates by 40 basis points in May, too. The only exception to this rate hike spree was the Bank of Japan, which continued with its ultra-dovish monetary response to support growth.
Japan’s Nikkei, on June 17, was 1.5 per cent lower while Australia’s main stock market index was down by more than 2 per cent, media reports said. June 16 saw a sell-off in the US, with the S&P 500 falling by 3.2 per cent even as the Nasdaq dropped more than 4 per cent. In India, the benchmark Sensex fell by over 2 per cent on June 16 to close at 51,495.79 points, the lowest in over a year. Metal and real estate stocks fell the most. On June 17, the Sensex recouped some of the losses and ended the day down 135 points at 51,360.42.
Market players had seen the US Fed rate hike and the actions by other central banks coming as these banks attempted to suck out the excess liquidity pumped into the system during the pandemic years. The US alone unleashed a stimulus of $5 trillion aimed at households, mom-and-pop shops, restaurants, airlines, hospitals, local governments, schools and other institutions. This year, China is likely to pump in an additional $5.3 trillion into its economy to battle the latest round of Covid outbreaks and lockdown-induced issues. Although inevitable during pandemic times, the backlash of these actions is that inflation tends to spin out of control.
Meanwhile, crude oil prices continue to be an area of concern. “It is not just the 75 basis points hike by the US Fed because it was expected before,” says Amit Gupta, VP and fund manager at ICICI Securities. “What is more worrying is the very, very sticky crude oil price because despite the dollar moving up, we have seen other commodities coming down, but not oil. The question is who will replace the 12 million barrels per day of Russian oil? There is no answer to it except Iran,” Gupta told a TV channel. The market is getting nervous because of high inflation and frontloading of interest rates, he adds.
Ahead of the US interest hike, the rupee, on June 13, had fallen to a record low of 78.28 against the dollar. Crisil, while announcing its latest Financial Conditions Index, said domestic financial markets were expected to face more pressure in coming months as the RBI and other major global central banks accelerate the pace of monetary tightening. “India is also becoming more vulnerable to external shocks as crude price has risen further to around $120 per barrel since May. Overall external vulnerability is worsening, though it is lower than in 2013 when taper tantrum had wreaked havoc,” it said. Going ahead, the stock market is expected to remain highly volatile as the uncertainties of the Ukraine war continue and both the US Fed and the RBI seem poised to raise interest rates further.
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