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How Far Should You Worry about Rate Hikes in the US? 😓

All events last week further solidified the idea of more rate hikes in the US.

  1. The Israel-Palestine conflict Hamas fired thousands of rockets at Israel and entered the country in a surprise attack. This was replied to by Israeli counter-strikes. The result was a blown-up conflict, which also killed several hundred people on both sides. Any conflict or war-like situation tends to spook the markets immediately and result in renewed fears of supply chain disruptions and resultant potential inflation.

  2. Rising oil prices The conflict also boosted already-rising oil prices. Oil prices have been on the rise over the last few weeks, led by more strength in the global economy than rate hikes would ideally deem, the potential rise of India and continued supply crunches by oil-producing majors. Additionally, under-investment in the oil sector has been resulting in structural supply pressures as infrastructure inefficiencies rise.

  3. Inflation is red-hot Consumer price data in the US further spooked investors. While the CPI in September was steady at 3.7% (still far above the Fed’s target of 2%), the core came in hotter than expected at 4.1%. This would give more reason for the Fed to hike rates further through the year, in line with comments by some Fed officials, and indications gathered from the Fed meeting minutes.

Wait, why should you care about this in India? Several reasons:

  • Any hikes in the US would result in renewed fears of an economic slowdown, which would impact India, although to a limited extent

  • Higher oil prices and inflation are a global problem, not just exclusive to the US. India’s dependence on imports for oil makes the situation worrying for India

  • Rate hikes across the world put some pressure on rate hikes in India too, to maintain relative yields on debt

However, all the above problems would have been a much larger problem for India 5 years ago. Given India’s structural growth factors, attractiveness at a global stage given relative growth outperformance, and thanks to cheap Russian crude, India is much less prone to damage from externalities at this point.

Although the markets have the potential to exhibit weakness in the near term owing to these uncertainties, the mid-long term continues to look promising.

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