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The US Federal Reserve raised interest rates to 0.75 percent to 1 percent. Increase from previous rate is 25 bps. It is the third rate hike since the financial crisis as the worlds largest economy shows signs of improvement.

However, contrary to the market anticipation, the projections given by the Fed were not aggressive and a dovish tone was adopted. The GDP growth was projected to be below 2 percent, while not much progress in productivity was forecasted either. After the press conference of Fed chair Janet Yellen, the market participants also cut down their estimates of future rate hikes which were tilted towards swift rate hikes.

The reaction of the global markets was opposite to what a rate hike would trigger. Treasuries and the dollar index went down while equities moved up. Emerging market currencies started rallying and squashed down fears of capital outflow for the time being. On the commodities side, lower dollar boosted both gold and oil.

On the domestic front, every rate hike by the Fed is putting further pressure on the rupee which is considered to be overvalued. External account burden is getting heavier by the day and if there is an unexpected increase in interest rates from other developed countries then it would be very hard to stop capital outflow.

As far as the stock market is concerned, there was not much reaction amidst a dull market. Banking stocks which are supposed to be the major beneficiary of rate hikes and subsequent increase in inflation remained on the downside.

Talking to BR Research, Gohar Rasool Head of International Sales at Intermarket Securities was of the view that the Fed rate hike has come as per market expectations and is likely to be a non-event for the rupee and stocks both. However, he was also of the view any further hikes in a short period of times could affect the expected inflows from emerging market funds.

Since the financial crises, all eyes had been on the Fed for monetary easing and now all other central banks will be keenly watching how the tightening cycle unfolds.

Copyright Business Recorder, 2017

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