Higher interest rates coming?

Thu, 7 Apr Pre-Open

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No, we certainly aren't referring to India here. We believe it has already had its fair share of rate hikes, eight in the past few months to be precise. What we are instead referring to is the US of A. Here, interest rates have been kept near zero since as long back as December 2008.

The trend though may not last for a very long time. Murmurs have started doing the rounds amidst a certain section of people in the US Fed that it is time lid on the interest rates is lifted.

Moneynews has reported how certain Federal Reserve officials have raised concerns that a big jump in energy prices could weaken the economy and unleash inflation. This in turn has prompted a few to suggest credit tightening this year.

Whether rates will be raised this year is a difficult question to answer. Infact, if anything, the probability seems on the lower side. This as the group within the Fed that believes rates should be raised is still in a minority. Majority of the members still continue to believe that the Fed will have to continue to keep interest rates at record low levels well beyond the current year.

We believe that the interest rates have been kept too low for too long. However, the irony is that majority of US Fed officials are still not willing to accept that runaway inflation is indeed a very strong possibility as of now. They keep on blaming things like higher energy prices on some external factors are not willing to accept that a part of the reason oil prices are high is also due to loose monetary policy of the US Fed.

What is comforting though is the fact that the reality of higher inflation down the line has at least dawned upon a few Fed officials. Should there be any further rise in inflation, it will be difficult to prevent other members of the Fed from defecting to the higher interest rates camp.

What will be the implication of such a move? Well, our guess is as good as ours. However, if history is any indication, risk assets like emerging market stocks and commodities could well witness a flight to safety. Unlike the last time though, the US dollar may not be the beneficiary of this move on account of its reducing possibility. That leaves us with the precious metal gold as the last man standing. Furthermore, it could also be an opportunity to invest in the long term India growth story as the same would be completely intact.