- US inflation at 4-decade high
- US interest rates rose 0.75%
To control record inflation, the US central bank’s Federal Reserve announced an interest rate hike of 0.75% on Wednesday. This is the biggest increase in U.S. interest rates in nearly three decades. Now, interest rates in America have risen to 1.50-1.75%. The rise in interest rates in America (US Interest Rate Hike) affects almost all economies in the world, including India.
Because of this rise in interest rates
Before knowing the impact on the Indian economy, let us tell you that the retail inflation rate in America is at 8.6%, which is the highest in almost 40 years. The Federal Reserve wants to bring it back to the 2% range. For this reason, the Federal Reserve is aggressively raising interest rates, to reduce liquidity in the economy and dampen demand. However, with this, the risk of recession on the economy will also become more serious due to the rapid increase in interest rates.
The pressure will come on RBI
After the Federal Reserve raised interest rates in the United States, its pressure also applied to the Reserve Bank (RBI). After the April MPC (RBI MPC), the Reserve Bank did not describe inflation as a special factor. After that, as soon as the Federal Reserve took an aggressive stance, the Reserve Bank hastily called an MPC meeting in May and started raising interest rates (RBI Repo Rate Hike). After that, at the regular meeting in June, the Reserve Bank raised the repo rate again. The retail inflation rate in India is currently at 7.04% and the Reserve Bank wants to bring it below 6%. For this, the repo rate was increased from 0.90% to 4.90% in two stages. After the latest Federal Reserve Bank hike, there will be pressure for a big hike.
The sale of REITs will increase
Apart from this, due to the rapid increase in interest rates in America, investments in India will also be affected. The faster the US raises interest rates, the narrower the gap between India and its rates will be. When this happens, the first effect is that foreign investors (REITs) begin to exit emerging markets more quickly. The Indian market is already facing strong selling by REITs. REITs have withdrawn more than Rs 2 lakh crore from the Indian market in the past few months of selling. In times to come, more speed can be seen in this area.
risk of rupee depreciation
Another effect of rising interest rates in America will be on the Indian currency. The Rupee (INR) has already fallen significantly and for the first time in history it fell below 78 against the Dollar (USD). The rupee was priced at 74.25 units against the dollar in January, which fell to 78.17 units on Wednesday. Dollar gets support due to REIT sell off. Rising rates should increase the selling of REITs, which will eventually strengthen the dollar. As a result, the risk of a further decline in the rupiah will intensify.
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