With the latest hike, US Fed's rate hikes reach 500bps in one year

After the latest 25-basis point (bps) rate hike by the US Federal Reserve the total rate hikes in the past one year has reached 500 bps to 4.75-5 per cent—a new high since 2007.

The US central bank expressed caution about the recent banking crisis and indicated that hikes are nearing an end.

Despite a sharp sell-off in the US markets overnight, the Indian markets have managed to hold their ground. The benchmark Sensex fell as much as 375 points, but recouped all the losses to trade in the green.

Amid the banking crisis, economists are pencilling in a rate cut this calendar year. But Fed Chair Jerome Powell last night said “rate cuts are not in our base case” for the remainder of 2023.

Given the Fed’s hawkish bent, the markets will continue to remain volatile, say analysts. However, with the Indian markets falling nearly 10 per cent from their highs, some believe value is starting to emerge.

In a note, Amish Shah, Head of India Research, BofA Securities said, “We believe one should look to buy the Nifty at 16,000 since our analysis suggests that the Indian economy contracts less or rebounds faster versus the US during US recessions. Consequently, the Nifty outperforms S&P 500.”

Bofa has a Nifty target of 18,000 for the year-end,

The Fed began cutting rates in March 2020 in the wake of the Covid-19 pandemic. On March 16, 2020, it delivered a 100 basis points (bps) rate cut to revive the stave off an economic crisis triggered by the shutdowns caused by the Covid-19 outbreak.

Between March 2020 and March 2022, the US central bank kept policy rates near-zero. But spiralling inflation caused the Fed to pivot to a hawkish stance.

The quantum of the four out of previous seven rate hikes has been an aggressive 75 bps. However, the latest two hikes by the Fed have been only 25bps.

The aggressive rate hikes have also weighed on the equity markets. At 3,937, The S&P500 of the US is below the levels seen before the Fed began its rate-hiking spree on March 16, 2022.

The Sensex is also barely 2.5 per cent above its March 16 close. While the Fed has remained steadfast with its objective to curtail inflation. The fight has now shifted to maintain a balance between bringing down inflation and avoiding financial instability.