A rise in interest rates will strengthen the dollar, but could further depreciate the rupee. The rupee is already at its lowest level against the dollar. On the foreign exchange market, the rupee fell 18 paise on Wednesday to end at a historic low of 78.22 against the American currency. The fall came on the back of disappointing trades on domestic stock exchanges and hurt investor sentiments from continued outflows of foreign capital.
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
The drop observed on the stock markets even before the announcement
Traders had distanced themselves from the market ahead of the results of the US central bank’s Federal Reserve meeting. There’s a saying in the business world that even if America sneezes, the world catches a cold. Prior to the US Fed meeting, stock markets around the world had fallen on expectations of higher interest rates. 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.
What will be the effect on India?
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 expectations of an interest rate hike from the US. In fact, what is happening is that as interest rates rise in the US, the spread between US and Indian government bonds narrows. Because of this spread, global investors are starting to pull money out of Indian securities.
Why is the US bank raising interest rates?
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. Loans become 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.
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