Federal Reserve Impact on Stock Market
Recently, US Federal Reserves has moved up its timeline for an increase in interest rates by one year from March 2024 to 2023. As an immediate effect, the Indian Stock Market started correcting after this news. But there are other possible reasons as well for this market fall. Let’s know more about this possible reasons and what could be the impact of this Federal Reserve on the Indian Stock Market.
Reasons of Falling Down of Stock Market
i) Federal Reserve:
- Federal Reserve has indicated that by 2023 it might increase the interest rate to check the inflation.
- Also, the Federal Reserve feels that the timing of tampering the quantitative easing is nearby. Quantitative Easing was done and is in the process to support the economy which has faced a setback due to Covid-19 Pandemic.
- Earlier, the tone of Federal Reserves for hiking the interest rates was in the year 2024. Till then, Federal Reserve will continue to provide support to the economy by printing money or purchasing bonds worth $100-$120 billion every month and providing liquidity in the market.
- But now the Federal Reserved has preponed the plan of Quantitative Easing Tampering to 2023 which is negatively impacting the stock market.
- If the Quantitative Easing Tampering preponed, then in 2023 interest rate can be hiked twice in the same year.
- Few of the Committee Members of the Federal Reserve has also advocated in the favor of hiking interest rate at least once in the year 2022.
ii) WPI & CPI:
- Wholesale Price Index (WPI) for May stood at 12.94% and the Consumer Price Index (CPI) stands at 6.3%.
- Both the WPI and CPI rates are quite high and have breached the comfortable range of RBI of 4%-6% which has directly or indirectly impacted the stock market.
- Here, the Reserve Bank of India- the Central Bank of India will have a close watch towards this inflation rate and might also decide on increasing the interest rate as per the situation.
- Yet again, this rise in interest rate will affect the stock market as the alternative will be developed in the form of a Debt Securities Investment.
- Also if the interest rate is hiked by the Central Authority on loans, then this will have a direct impact on the companies profitability as well.
Indication of Federal Reserve:
- The situation of preponing the Quantitative Easing Tampering or hike in interest rates from 2024 to 2023 is a piece of negative news for the market.
- Looking at this side of the Federal Reserve, it is also quite possible that this preponement can also be done quite before 2023.
- From the current point of time, there are still 1.5 years left for 2023, but this is the reason what the market is discounting and is falling continuously for the last 3 days.
- The increase in interest rate by Federal Reserve may impact highly to the Emerging Equity Market and not the Developed Equity Market.
The 2 major reason behind the continuous fall in the stock market is due to Changing tone of Federal Reserves towards Quantitative Easing Tampering, the possibility of interest rate hikes, and inflation in the Indian Economy. The only shield for the Indian Economy to safeguard from these rate hikes is decent economic growth and good profitability growth. Also at this point, one can look forward towards their Asset Allocation and rebalance their portfolio accordingly. Do consult a financial advisor before making any investment decision or for making proper asset allocation.