US monetary policy
Government infusion of funds into public sector banks (PSBs)
How are the Indian and global economic environments affecting the financial markets?
The US Federal Reserve, just as we expected, despite pressure from the markets not to raise the federal funds rate, has raised the rate to the range of 2.25 – 2.5% while slowing down the number of expected rate increases in 2019 to 2. This gives the Fed time to take stock of the US and global economies perhaps until June 2019 before deciding on interest rate policy again while being mindful of whether the interest rate is at neutral – the interest rate at which economic growth is neither supported nor restrained – with inflation hovering near the Fed’s target of 2 percent year-on-year rise in core (meaning excluding the volatile food and energy costs) personal consumption expenditures (PCE). The US financial markets which fell interpreted the Fed’s December 19, 2018 decision to raise the interest rate by 25 basis points while slowing rate increases in 2019 as being dovish, reinforcing their bearish sentiments about US and global growth. For India, as with other emerging markets, interest rate increases by the Fed coupled with apprehensions about slowdown in global growth pressure the financial markets because of dollar flight back to US and fear of domestic economic slowdown.
Indian government’s decision to infuse funds into PSBs to ease credit crunch in the system and the Reserve Bank of India’s (RBI’s) decision to ease liquidity in the financial sector will boost PSB and NBFC stocks.
What to expect from the markets next week?
Indian financial markets will continue to takes cues from global markets on global growth though little else can be expected in terms of news before the end of the year to have any major impact on them. Continuing decline in the oil price because of oversupply concerns due to expectation of global economic downturn despite agreement to cut output by 1.2 million barrels per day between the Organization of the Petroluem Exporting Countries (OPEC) and Russia. For India, the falling oil price balances any downward pressure on the economy and rupee from US Fed rate increases and slowing global growth.