US Fed rate hike: Why is the world in turmoil over rising US interest rates?  This time may be the biggest increase in 28 years
New Delhi: Just as there is RBI in India, so the US central bank is the Federal Reserve. You must have read in the news recently that RBI increased the repo rate to control inflation. The repo rate is the interest rate at which RBI lends to banks. It is also called the prime interest rate. All types of loans become expensive when the repo rate increases. Now, if the RBI raises the policy interest rate, then its effect is limited to India. But when the Federal Reserve raises interest rates, there is a global outcry. Newspapers around the world are beginning to speculate about a possible change in interest rates well before the US Fed meeting. Today we will know what effect rising interest rates in America have on the world. Before we go any further, let’s first know why the US Fed is in the news right now.

The US Fed could make the biggest rate hike in 28 years

In fact, this week, the American central bank, the Fed, will decide on key interest rates. The US Fed will wrap up its two-day meeting on Wednesday and announce changes to interest rates. Many economists around the world believe that this time the Federal Reserve may make the biggest rate hike in 28 years. The US central bank could announce a 0.75% increase in the interest rate. Such an interest rate increase would be the largest since November 1994. Let us tell you that the US central bank has raised interest rates by 0.75% since March, bringing that rate to 1%.

us federal rates

There will be a big impact on the stock markets

There’s a saying in the business world that even if America sneezes, the world catches a cold. Stock markets around the world are in a downtrend due to expectations of higher interest rates even before the US Fed meeting. The Bombay Stock Exchange (BSE) Sensex index also closed 1457 points on Monday. In fact, due to low interest rates in America, investors are taking loans there and investing in emerging markets like India to earn good returns. This is called the carry trade. When interest rates remain low in the United States, there is a huge flow of money to emerging markets in the form of REIT investments. This strengthens stock markets. We have seen for several months that foreign investors are continuously selling in Indian markets and inflows are decreasing. Higher interest rates reduce returns for foreign investors and they turn to other investment options such as the dollar.
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Rates are rising all over the world

When the prime interest rate rises in America, countries around the world also begin to raise their prime interest rates. In India too, the RBI started raising the repo rate amid high expectation of an interest rate hike by the US. In fact, what is happening is that the spread between US and Indian government bonds is narrowing as interest rates rise in the US. Because of this spread, global investors are starting to pull money out of Indian securities. In India too, the RBI needs to raise interest rates so that there is no withdrawal of REITs from the Indian bond market. Similarly, other economies around the world are also raising interest rates.
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The value of other currencies decreases against the dollar

In the United States, due to rising interest rates, the value of the currency there increases. The dollar is starting to strengthen. As a result, the value of other currencies like the rupee decreases against the dollar. On the other hand, if money is taken out of India by foreign investors, the rupee will weaken further. In such a situation, the government should take action as soon as possible to strengthen the rupee.

Inflation becomes a problem

Inflation in the United States is currently rising at the highest rate in 40 years. In May, the inflation rate in the United States was recorded at 8.6%. The Fed Reserve makes the decision to increase key rates solely to control inflation. In fact, loans become more expensive as interest rates rise. It reduces people’s expenses. In such a situation, the demand decreases and the prices of goods begin to fall. On the other hand, if the US Fed raises interest rates to curb inflation, the dollar strengthens. As a result, the value of Rs. Due to the weakening of the Rupee, the Indian government has to pay a higher price for imported commodities like crude oil. As a result, gasoline and diesel prices will rise and there will be inflation in the country.

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