February 7, 2018

India’s central bank RBI noted that the financial markets have become volatile due to concerns surrounding the pace of normalisation of the US Fed monetary policy especially after a report released by the US Labor Department said that wages shot up in recent times, adding to the fear of rising inflation.

After the vicious global stock market sell-off witnessed yesterday, India’s central bank RBI noted that the financial markets have become volatile due to concerns surrounding the pace of normalisation of the US Fed monetary policy especially after  a report released by the US Labor Department said that wages shot up in recent times, adding to the fear of rising inflation. According to a US Labour Department report released last week, private-sector wages and salaries in the United States rose 2.8 percent in the final three months of 2017 compared with a year earlier, the fastest growth since the recession. We take a closer look at what RBI has to say about the rising volatility.

Concerns over US Fed monetary policy

While the current inflation rate doesn’t cause too much worry at 1.7% in the United States, financial markets have turned volatile after rising concerns that expected wage growth could mean sharper increases in interest rates should the “Financial markets have become volatile in recent days due to uncertainty over the pace of normalisation of the US Fed monetary policy in view of January payrolls data showing rapidly accelerating wage growth and better than expected employment,” RBI said in its Sixth Bi-monthly Monetary Policy Statement released today.

Volatility is at its peak across markets

The apex bank notes that volatility has reached unprecedented levels, and the volatility index (VIX) has climbed to its highest level since Brexit. “Equity markets have witnessed a sharp correction, both in AEs and EMEs. Bond yields in the US have hardened sharply, adding to the upward pressures seen during January, with concomitant rise in bond yields in other AEs and EMEs. Forex markets have become volatile as well,” RBI noted in its report.

Positive investor sentiment prior to the sell-off

RBI notes that prior to the recent stock market rout, global financial markets were buoyed by investor appetite for risk, corporate tax cuts by the US, and stable economic conditions. Further, the apex bank says that equity markets had gained significantly in January, driven by robust Chinese growth, uptick in commodity prices, and positive corporate sentiment in general. “In currency markets, the US dollar had touched a multi-month low on February 1 on fiscal risks and improving growth prospects in other AEs,” RBI said in its report.

[The Financial Express]