US Fed Signals Rate hike positive. How will it affect the Indian economy?

US Fed Signals Rate hike positive.  How will it affect the Indian economy?

Positive interest rate hikes by the Federal Reserve will put more pressure on the stock market

New Delhi:

The Federal Reserve, the central bank of the United States, on Wednesday raised its policy rate by 75 basis points. This is the Federal Reserve’s third consecutive rate hike since June, and it heralds many larger hikes in the coming months.

How will the US Federal Reserve’s aggressive interest rate hike affect the Indian economy? There is a popular saying that when America sneezes, the rest of the world catches a cold. This is evident from its impact on global stock, currency and commodity markets.

The Fed’s action sent global stock markets into the fray. Indian stock markets, major indexes fell for the third consecutive day on Thursday. 30 S&P BSE Sensex shares fell 337.06 points, or 0.57%, to 59,119.72 points. The National Stock Exchange’s broader Nifty 50 fell 88.55 points or 0.5% to close at 17,629.80 points.

The Indian rupee fell to a record low of 80.86 per US dollar on Thursday from the previous day’s close of 79.97. This was the rupee’s biggest single-day drop in value in seven months.

A positive interest rate hike by the Federal Reserve will put additional pressure on the stock market. As interest rates rise in the US, investors pull assets out of emerging markets. Due to high interest rates, more capital flows into the US economy.

The difference between interest rates in India and the United States has narrowed in recent months. This is because the Federal Reserve has been more aggressive in raising interest rates than the Reserve Bank of India.

The Federal Reserve’s cumulative interest rate increase is 300 basis points, or 3 percentage points. The Fed has raised interest rates by 75 basis points three times since June. On the other hand, the Reserve Bank of India (RBI) has raised its policy repo rate by 140 basis points since April.

The Federal Reserve System’s Board of Governors voted unanimously to raise the interest rate paid on reserve balances to 3.15%, effective September 22, 2022.

In August, the RBI Monetary Policy Committee increased the repo rate by 50 basis points to 5.40%. The repo rate is the rate at which the central bank lends money to commercial banks.

So far in 2022, the RBI has tripled the policy repo rate. The cumulative gain is 140 basis points, or 1.40%. The RBI first raised the policy-return rate by 40 basis points in April and it has been increased by 50 basis points twice through August.

The US Federal Reserve has also tripled interest rates this year. However, the Fed has been more aggressive in raising rates when compared to the RBI. The US Fed’s cumulative interest rate hike is 300 basis points, or 3%.

The policy interest rate gap between the US and India, which stood at 3.85% at the beginning of this year, has narrowed to 2.25%.

A drastic rate hike by the Fed will force the RBI to raise the RBI repo rate. The RBI Monetary Policy Committee is scheduled to meet September 28-30. The RBI is expected to raise the repo rate by 35 to 50 basis points later this month.

PGS Chairman, Mr. Sumant Sinha, said that a 35-50 basis point increase in the benchmark rate seems inevitable at this time amid continued tightening of the US Federal Reserve and other central banks. currency.

Sinha said: “India is in a favorable position with growth coming from all quarters and inflation relatively under control. Falling crude oil prices will do good for the economy and we should starting the rate-cutting cycle from the beginning of fiscal 24”.

“While the Fed maintains a hawkish stance, the steady pace of rate hikes and a slight improvement in inflation suggest downward pressure,” said Ravindra Rao, head of commodities research at Kotak Securities. for the central bank to act aggressively.”

“We could see some adjustment to the US dollar as the central bank acknowledges an improving inflation situation. Another challenge for the US dollar could be a strong tightening of the US dollar. other central banks to control inflation as well as central bank interventions to support their currencies. Rao said.

The Indian economy is very vulnerable to interest rate hikes by the US Federal Reserve. High interest rates in the US will make Indian stocks less attractive to foreign investors. It could lead to capital outflow from India. This will put more pressure on the Indian rupee. A weak rupee will make imports more expensive leading to a widening current account deficit. The trade deficit could widen further. It could lead to prolonged import inflation forcing the RBI to implement a policy of aggressive rate hikes.

(Except for the title, this story has not been edited by NDTV staff and is published from an aggregated feed.)

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