US Federal Reserve chairman's speech may trigger fall in Indian equity market

By Express News Service

NEW DELHI: Indian equity markets could feel the ripple effects of US Federal Reserve chairman Jerome Powell’s Jackson Hole speech on Monday. In his speech, the Fed chairman gave enough hints that the US central bank is not going to mellow down its aggressive stance against inflation anytime soon and that it is ready to sacrifice growth in order to rein in inflation.

Experts now see even a 75 basis point increase in US policy rates in September. The speech jolted the US equity markets with three benchmark indices Dow Jones, S&P and Nasdaq all crashing by 3% on Friday.
The ripple effects of this could be seen on Monday in Indian markets, which had a topsy turvy five sessions this week.

“Powell sounded ultra-hawkish in his brief speech at Jackson Hole. The Fed chief warned of some pain ahead in the economy. This is an indication that the rate hike in September can be large, even 75 bps in September, even though he reiterated that the rate hike decisions will be data-driven,” says V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

He adds that markets will be concerned about the tight monetary conditions persisting longer than expected, and the near-term impact on equity markets will be negative “Indian markets are also likely to react negatively on Monday with increasing volatility over the next few days,” says Siddhartha Khemka, Head – Retail Research, Motilal Oswal Financial Services Ltd.

Powell in his Jackson Hole speech said: “Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth.”  

He said while higher interest rates, slower growth and softer labour market conditions will bring down inflation, they will also bring some pain to households and businesses. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” insisted Powell.

Any aggressive policy stance by the Fed could get reflected in the policy stance of the RBI. In the Minutes of the meeting from August 3 to 5, members of the Monetary Policy Committee expressed their concern over inflation being above the RBI’s tolerance level, and they opined that any slack in policy response might raise questions on the credibility of the Central Bank’s inflation targeting mandate.

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