Turbulence and spillover

Financial markets are watching anxiously as the effects of rate hikes by the United States (US) Federal Reserve (Fed) unravel.

Over the past 15 months, the Fed has hiked its policy rate by 500 basis points (bps), the fastest pace of hikes since 1980, to 5.00-5.25%. The sharp rise, after a decade of record low interest rates, has already tested segments such as the tech sector, and small regional banks in the US.

Risks of more malfunctions and further tightening in global financial conditions remain high. The International Monetary Fund (IMF) had equivocally noted this in its April outlook: “Below the surface, however, turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us”.

In this insight, we examine how this bubbling cauldron of financial risks could spill over to India. We bring together the risks to watch, the channels of impact, and India’s vulnerability to such shocks.