How will a US interest rate hike impact India?
The much-anticipated interest rate hike by the US Federal Reserve may be announced today after a two-day meet.
- Mar 16, 2022,
- Updated Mar 16, 2022 1:49 PM IST
The US Federal Reserve is facing a tough job of walking the tight rope between controlling the red-hot inflation and supporting growth.
The situation has become more challenging in the backdrop of volatile crude and geopolitical tensions casting a dome of uncertainty.
What could the US Fed do this time?
Experts believe the US central bank might bite the bullet and announce a 25-basis points rate hike to address the worst inflation in more than 40 years.
If this happens, it will be the first-rate hike in the US since 2018. This means the central bank will close the door on its ultra-easy pandemic-era monetary policy.
But how do higher interest rates reel in inflation?
The Fed policymakers aim to make borrowing more expensive so that consumers and businesses hold making investments, thereby cooling off demand and hopefully the prices.
How many rate hikes are expected this year?
While analysts have been predicting anywhere between six to seven rate hikes in the year, Russia-Ukraine war may alter the predictions as if the Fed continues to raise interest rates too quickly, it could dampen demand too much thereby stalling economic growth which could ultimately lead to higher unemployment.
What will be the impact on India?
Higher interest rates in the US usually lead to foreign investors pulling their money from emerging markets like India back to the US for safer, and more secure returns.
Foreign institutional investors have already sold over Rs 2 lakh crore worth of Indian equities since October.
Further capital flight will put pressure on the RBI to hike interest rates or lead to rupee depreciation against the dollar, which again would lead to imported inflation for India.
Also Read: Macrotech Developers shares gain 4% after Mauritius arm prepays $170 mn debt
Also Read: ‘MoveOS 2.0 almost ready’: Bhavish Aggarwal gives update on Ola e-scooter operating system
The US Federal Reserve is facing a tough job of walking the tight rope between controlling the red-hot inflation and supporting growth.
The situation has become more challenging in the backdrop of volatile crude and geopolitical tensions casting a dome of uncertainty.
What could the US Fed do this time?
Experts believe the US central bank might bite the bullet and announce a 25-basis points rate hike to address the worst inflation in more than 40 years.
If this happens, it will be the first-rate hike in the US since 2018. This means the central bank will close the door on its ultra-easy pandemic-era monetary policy.
But how do higher interest rates reel in inflation?
The Fed policymakers aim to make borrowing more expensive so that consumers and businesses hold making investments, thereby cooling off demand and hopefully the prices.
How many rate hikes are expected this year?
While analysts have been predicting anywhere between six to seven rate hikes in the year, Russia-Ukraine war may alter the predictions as if the Fed continues to raise interest rates too quickly, it could dampen demand too much thereby stalling economic growth which could ultimately lead to higher unemployment.
What will be the impact on India?
Higher interest rates in the US usually lead to foreign investors pulling their money from emerging markets like India back to the US for safer, and more secure returns.
Foreign institutional investors have already sold over Rs 2 lakh crore worth of Indian equities since October.
Further capital flight will put pressure on the RBI to hike interest rates or lead to rupee depreciation against the dollar, which again would lead to imported inflation for India.
Also Read: Macrotech Developers shares gain 4% after Mauritius arm prepays $170 mn debt
Also Read: ‘MoveOS 2.0 almost ready’: Bhavish Aggarwal gives update on Ola e-scooter operating system