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Current Affairs

Federal Reserve’s stance and India

Date: 25 September 2021 Tags: World Economy

Issue

The Federal Reserve has announced to maintain an ‘accommodative stance’ until inflation targets are achieved and employment targets reached.

 

Background

Stock exchanges in India were worried ahead of the meeting of the Federal Reserve. The decisions have brought comfort to market participants.

 

Details

The indications of rates being raised towards the end of 2022 and gradual tapering of the bond purchase programme is also a welcome sign.

 

The effects

  • The Sensex at Bombay Stock Exchange rose by 1.6 percent or 958 points to reach a new high of 59,885. 

  • The Nifty at National Stock Exchange also rose by 1.57 per cent to reach 17,882. The possible concerns due to Evergrande default has also waned away.

 

The decisions

  • The range for federal funds has been kept at 0 to 1/4 per cent. This will be maintained until labour market conditions achieve stability.

  • To slow down the flow of liquidity, the market expects the Fed to start tapering of bond market. It will enhance diversion.

 

Implications of decision

  • A decline of $15 billion per month will be experienced in asset purchases. There is a projection that hike will be made by 25 basis points for at least three times in 2023.

  • The low rate by US Fed will ensure that fund flows from foreign portfolio investors (FPIs) into Indian equities.

 

The road ahead

Faster rate of vaccination is expected to neutralize the effects of a third wave. The economy will grow due to consumption-driven growth.