After a 0.25% rate hike by the US Fed, global markets ended on a mixed note in the week gone by. While markets in the developed economies ended strong, the indices in the emerging economies fell on concerns of foreign investors pulling out money from these markets post the rate hike.
In its monetary policy, the US Federal Reserve raised interest rates by 25 basis points to 0.75% This the first hike since December 2015 and only the second one in the decade. The Federal Open Market Committee (FOMC) cited an improving economy and a strong outlook for the labour market as reasons for the hike. Going ahead, the US Federal Reserve has indicated a hawkish stance with respect to hike in interest rates. The FOMC, in an effort to progress towards its inflation goal, has projected three rate increases in 2017, putting the rate at 1.4% by the end of the year. It would then rise to 2.1% by the close of 2018. The Fed’s aggressive tone sent the US dollar to 13-year highs. While the US market was up 0.4%, Japan was the biggest gainer, up by 2%, as a weak yen against the rising dollar makes the country’s exports more competitive. Germany and France were the other gainers registering gains of over 1% for the past week.
Among the emerging economies, Brazil, China and Hong Kong were the biggest losers after the US Fed flagged a faster pace of interest rate increases than expected in 2017. Each of the markets registered a downfall of more than 3% last week.
Back home in India, market indices also bore the brunt of the rate hike even as the ongoing demonetisation drive continues to weigh on demand and financial performance of companies. The index was down by 1% in the week gone by.
Key World Markets During the Week
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On the sectoral indices front, barring IT stocks, all the major indices closed on a negative note. Metal (down 4.4%) and Telecom (down 3.7%) were the biggest losers for the week.
BSE Indices During the Week
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Now let us discuss some key economic and industry developments during the week gone by.
A cash shortage on account of the demonetisation drive manifested itself in the form of a forced slowdown in demand pulling down inflation. The Wholesale Price Index (WPI) data released by the Central Statistics Office (CSO) showed the annual wholesale inflation declining for the third consecutive month to 3.2% in November. The corresponding figure for October stood at 3.4%.
The fall in the WPI can also be attributed to the fall in food inflation. Food articles, which have a weight of 14% in WPI, declined to 1.5% in November. This was seen as against 2.6% in October and 5.6% on a YoY basis.
While inflation for primary articles fell in November, fuel and power and manufactured products group inflation continued to rise during the month. Manufactured products inflation, having a weight of 65%, rose to 3.2% in November as compared to a contraction of 1.4% in the same month last year. Similarly, inflation for fuel and power stood at 7.9% in November as compared to a steep contraction of 11% in November last year.
Along with the WPI, the Consumer Price Index (CPI) also fell to a two-year low during the month of November.
Demonetisation alone is not helping the low inflation numbers. As we stated in one our recent editions of The 5 Minute WrapUp…
- ‘The expected fall in the inflation will be on account of three key reasons. First, the favorable base effect. Second, the harvest hitting the market. And last, the impact of the demonetisation which is mainly hitting the prices of the perishable commodities like fruits and vegetables.’
According to data released by the government, India’s merchandise exports grew for the third consecutive month in November this year. However higher imports owing to gold purchases have pushed the trade deficit to 2 year high of US$13 billion. Part of the gold imports could also have been due to the demonetisation with various reports showing high gold purchases to absorb the cancelled currency.
