Applying US Fed's Rates Decision on India

Applying US Fed's Rates Decision on India

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March 25, 2023

The Federal Reserve decided on Wednesday to continue its campaign against high inflation by raising interest rates for the ninth time in a row, despite the strain that the banking industry was experiencing as a result of the collapse of two regional banks. The Fed's policymakers made the decision to raise their benchmark interest rate by a quarter of a percentage point to just under 5% in a unanimous vote. People who want a car loan or have a credit card balance will pay more because of this.

By increasing the interest rate by 25 basis points, the Federal Reserve Bank of the United States sent a clear signal that the fight against inflation will take precedence over the turmoil in the banking sector. IFA Global claims that the increase was anticipated because a pause would have indicated a lack of confidence in the measures taken to address the banking system's issues. The Federal Reserve is still determined to fulfill its inflation mandate. The global banking system will likely be affected by the US central bank's decision to raise interest rates.

How do bank interest rates affect the economy? - The increases will have an effect on the economy's demand and raise lending rates in the banking system. Money becomes more expensive when interest rates are raised, which reduces demand in the economy and lowers inflation. a lot of EMIs: Existing borrowers will face higher equated monthly instalments (EMIs) as a result of the rate hike, which will force banks and non-banking finance companies to raise lending rates. Costs for personal, vehicle, and new home loans will also rise.

What implications does the Fed's hike have for investors? - Foreign investors, particularly those from the United States, seek out investments in US debt and other avenues when interest rates rise in developed markets like the US and India. Foreign portfolio investors (FPIs) have taken a net outlay of more than Rs. 27,000 crore from Indian stocks since January 2023.

Will the RBI's interest rates also rise? - The Fed's decision also indicates that the RBI will continue to raise rates and that equity market returns will remain muted for the time being. India's interest rates have actually moved in tandem with those in the United States, even though it is not necessary for the RBI to blindly follow the Fed and other central banks in raising rates. While the majority of central banks, including the RBI, have been raising rates to control inflation, the RBI reviews interest rates taking into account domestic factors, particularly retail inflation. Several central banks have chosen pauses or slower rate increases as price pressures ease.

Effect on India - Increasing the risk for investors: Indian stocks are hurt by rising interest rates, but our strong domestic demand scenario gives global investors who want to diversify globally hope. causes the currency to appreciate: India is one of the emerging markets where interest rates tend to rise more quickly because of the country's sharp currency depreciation. Inflation target deviation: Excessive demand, a tight labor market, and an unprecedented deviance from the inflation target are the reasons for the Fed's action. Policy nominal rates: Additionally, it began with higher nominal policy rates.