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Back-to-back-to-back 🔄

With another 75 bps of a rate hike, the Fed has gone back-to-back-to-back on rates. Now this was expected, wasn’t it? In fact, some were even hinting towards a 100 bps hike.

And still, after the rate hike announcement, global markets (including India) fell for three straight days.

The Nifty 50 lost 1% over last week. However, since the Fed rate hike announcement, it has lost 3%, with Friday’s fall being rather steep.

Why are the markets falling when the rate hike was already expected?

  1. Even if it’s expected, it’s grave - The Fed has boosted rates at its fastest pace in the last four decades, and rates are now as high as they were in 2008.

  2. There’s more coming - Fed officials expect steeper hikes next year, followed by a cutting back of rates in 2024. The Fed projected unemployment to spike by the end of 2023. Higher rates and higher unemployment are usually accompanied by a recession.

  3. Inflation may not cool down - Despite aggressive rate hikes, inflation may not really come down. Unfortunately, the tools used for fighting inflation (rate hikes), don’t solve for a major contributor to inflation (supply issues).

  4. The economy definitely will cool down- In this attempt to tame inflation, the economy will definitely slow down. The impact can already be seen in Treasury yields, the sell-off in US equities, and falling home sales.

  5. The world is synchronised - Global central banks are all making moves in tandem with each other, either marred by the same problems or just trying to save their currencies and liquidity.

💡 Our take: Inflation isn't over, and rate hikes aren't too. The RBI too is expected to increase rates by 50 bps. India may grow at the fastest pace in the world, but it is also trading at valuations highest in the world! Periodic corrections are likely to be normal in the grand India growth story.

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