Skip to main content

Fed rates and Indian domestic economy

The relation between the Fed’s interest rates and the markets here

The US Federal Reserve has decided to leave the interest rates unchanged. However, it has expressed concerns on the escalating crisis. The unanimous decision left the benchmark overnight rates at two percent. The Fed has said, 'strains in the financial markets have increased significantly and labour markets have weakened further'. The central bank said it also remained concerned about the inflation pressures. The Fed said the downside risks to growth and upside risks to inflation are of significant concern to the committee. The move is expected to enable banks in the US to borrow money for the short term from the Fed as well as lend to each other at the same rate as before.

In the past few months, the Federal Reserve had been cutting US short-term interest rates amidst concerns that the economic growth will slow down in the coming months. The effort was to stimulate economic activity and keep the country from dipping into a recession. According to the Federal Open Market Committee (FOMC) the upside risks to inflation roughly balanced the downside risks to growth. Earlier, the FOMC had indicated that the strains in the financial markets had somewhat eased. Housing is likely to slow the pace of economic slowdown, it added. Though, some inflation risks is arising.

With the last year bankruptcy of the financial major Lehman Brothers and troubles of AIG, the Fed had no other option but to keep the interest rates steady. A good point was that the oil prices have somewhat eased. According to the Fed, the pace of economic expansion will slow down in the near term, partly reflecting the intensification of the housing correction.

Last year, the Fed had slashed borrowing costs periodically. The concerns over housing and credit seem to be dominant. The Fed had reduced rates in an effort to keep the economy growing at a 'moderate pace'. The move was aimed to avoid a recession.

The central bank's present move will offer some relief to the ailing credit markets which have tightened as major commercial banks have sustained hefty losses tied to mortgage backed securities. This action will help stabilise the financial markets.

There are still sectors of the credit markets that are not functioning very well. Without enough capital, firms hesitate to invest.

The Fed has cited concerns of rising energy and commodity prices which could renew inflationary pressures. Also, housing and credit worries outweigh inflation risks. Sales of existing homes and apartments have dropped.

Inflows from abroad may reduce after the Federal Reserve maintained interest rates. There would certainly be some repercussions on the domestic markets. It may be a signal to the Reserve Bank of India (RBI) that interest rates need to be maintained at the present levels.

In the past, the rate cuts by the Fed have translated into a major boost for the domestic stock markets, and increased inflows of foreign funds. With an increase in foreign funds, the dollar depreciated against the rupee. So, exporters felt the pinch. Moreover, with foreign funds pouring in, liquidity increased and the risks of inflationary pressures also increased. A fresh flood of capital complicated the monetary and inflation management for the Reserve Bank of India. There were pressures on asset markets (stocks, bonds, currencies) on the back of risk-aversion induced capital outflows. The US holds significant implications for emerging markets.

The Fed interest rate stability helps the worth of US dollar-denominated investments. The dollar is likely to stop depreciating further against the rupee. The rupee has appreciated nearly 12 percent against the dollar in the last one year. The rising rupee value prompted most engineering and textile sector exporters to go for forward bookings of export shipments. This can help the competitiveness of exporters, especially textile and garment players.

Popular posts from this blog

Retirement planning from a long-term perspective

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds     `HOW green was my valley'. This title comes from a movie I had watched many years ago. A little boy's journey into adulthood and the story of a Welsh valley's turn of-the-century descent from pristine paradise to despoiled coal mining.   I thought of the title because it is comparatively reflective of a person's life ­ the glorious years when he is earning and the sun down years when he is not having his regular job and, hence, his living standards comes down. The reason is a combination of things. Inflation of food items, transport, increase in health related costs in the later years of life and increase in expenses in almost all basic amenities of life. In India, the social security system is almost non-existent. In some states, wherever it is available, the scales of benefits are extremely modest...

CNX Midcap vs BNP Paribas Midcap Fund

BNP Paribas Midcap Fund - Invest Online   Te  performance of BNP Paribas Midcap Fund  – which has across the last 3 years generated superior returns over the benchmark – especially when the markets have gone down the fund has handsomely outperformed the benchmark preserving the capital of the investors. The fund has been able to do this only due to the superior stock selection process ( BMV approach) that is diligently followed at BNPP.   Highlights of BNP Paribas Mid Cap Fund:   Investment Objective : BNP Paribas Mid Cap Fund gives an investor exposure to invest in the various quality midcap stocks. The fund also has some exposure to large as well as small cap stocks.   Investment Approach : BMV ( Quality and scalability of Business →Good Management → Reasonable Valuation ) with Bottom-up stock picking.   Most of the investors are way happier if the fund that they have invested in is a significant Outperformer in tough times than in Good ti...

Investment Strategy - What is Sector Rotation Theory?

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   The economy goes through cycles : it expands for a few years and then contracts. Study of historical data suggests that different sectors tend to perform well on the stock markets during different stages of the economic cycle. While history never repeats itself exactly, some broad patterns tend to recur. Investors can take advantage of the sector rotation theory to move their money from those sectors that have seen their best times to those that are likely to do well in future.   The person who developed the sector rotation theory is Sam Stovall, chief investment strategist at Standard & Poor's. He developed this theory by studying data on economic cycles going as far back as 1854 provided by the National Bureau of Economic Research ( NBER ) of the US.   When trying to correlate stock-market perfor...

Factors Affecting Silver Rates in India

  Factors Affecting Silver Rates in India There are a lot of factors at play that impact silver prices in India. Even though silver rates have shown a steady increase over the last two decades, the historical trends should not be taken as a benchmark when considering future price volatility. Investment in silver as a commodity has gained steam in the country, and investors need to factor in various variables if they are to make decent profits from silver in the short/long run. Large investors:   The silver market is much smaller than the gold market. As such, large investors or traders can potentially influence silver prices. A point in case here is Warren Buffet buying 130 million troy ounces of silver in 1997 at $4.50/ounce, which impacted market prices. Oil prices:   Mining of silver is an energy-intensive process, and so silver prices are correlated with oil prices, the primary energy source in today's world. Also, imported silver requires a strong logistics platform backed by ...

LIC's JEEVAN SHIKHAR

  LIC's Jeevan Shikhar is a participating, non-linked, saving cum protection single premium plan wherein the risk cover is ten times of Tabular Single Premium. The proposer will have an option to choose the Maturity Sum Assured. The premium payable shall depend on the chosen amount of Maturity Sum Assured and age at entry of the life assured. This plan also takes care of liquidity need through its loan facility. The plan will be open for sale for a maximum period of 120 days from the date of launch. 1.   BENEFITS   : a) Death Benefit: On death during first five policy years: Before the date of commencement of risk   :   Refund of Single Premium without interest. Single Premium mentioned above shall not include any extra amount if charged under the policy due to underwriting decision and taxes. After the date of commencement of risk   : "Sum Assured on Death" equal to 10 times the tabular single premium shall be payable. On death after completion of five policy years but b...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now