The Fed rate hike has been going on steadily since Janet Yellen started the process in December 2015. Janet Yellen had identified 3 critical factors which could impact the decision to hike rates. She called for a pick-up in GDP growth, fall in unemployment to 5% and inflation above 2%. The GDP has surely shown signs of picking up in the US. The rate of unemployment has been falling consistently since 2009 and is now close to 5%. Inflation is still below 2% due to the effect of cheap oil, but that may not be a sustainable rate. If the recent statements of Janet Yellen are to be taken at face value, then a rate hike may actually come as early as September this year.

A rate hike means tight money and tight money has never been great news for the economy. However, in the case of the US there are two additional features. It is a major source of portfolio flows into other countries and prints the currency which is the largest constituent of global currency reserves. This makes the problem slightly more complicated. Since India does depend on portfolio flows from FIIs to bridge the fiscal deficit gap, it has a strong impact on the Indian markets too.