{"id":9875,"date":"2022-06-17T16:37:50","date_gmt":"2022-06-17T11:07:50","guid":{"rendered":"https:\/\/polscienceweb.com\/?p=9875"},"modified":"2022-06-17T16:38:26","modified_gmt":"2022-06-17T11:08:26","slug":"u-s-fed-interest-rate-hike-and-its-impact-on-india","status":"publish","type":"post","link":"https:\/\/polscienceweb.com\/index.php\/u-s-fed-interest-rate-hike-and-its-impact-on-india\/","title":{"rendered":"U.S. Fed interest rate hike and its impact on India"},"content":{"rendered":"\n
<\/div>\n\n\n\n

The Federal Reserve of the United States announced the most aggressive interest rate hike in nearly 30 years, raising the benchmark borrowing rate by 0.75 percentage points.<\/p>\n\n\n\n

Basics<\/strong>: Rising interest rates will make U.S. bonds more appealing, causing investors\/citizens to invest in them rather than spend. Borrowing will also become more expensive, which will keep inflation in check. In addition, FII from emerging markets may withdraw funds and invest in U.S. bonds. This will strengthen the U.S. dollar against other currencies.<\/p>\n\n\n\n

<\/div>\n\n\n\n

Impact on India:<\/strong><\/h3>\n\n\n\n
<\/div>\n\n\n\n

1. When the Fed raises its policy rates, the difference between the interest rates of the two countries narrows, thus, making countries such as India less attractive for the currency carry trade.<\/strong><\/p>\n\n\n\n

2. Higher returns in the U.S. debt markets may also lead to the flight of foreign investors from India<\/strong>.<\/p>\n\n\n\n

3. It could weaken the Indian currency <\/strong>vis a vis U.S. Dollars.<\/p>\n\n\n\n

4. The Fed rate hike will have a direct impact on the rupee and gold. When the dollar gains in value, the rupee value also drops, and so gold bought in rupees will be more expensive. Moreover, gold is considered to be a safe bet during times of uncertainty. So, more people will look to diversify their money and not park their money in bank deposits. This will lead to a hike in the gold price.<\/strong><\/p>\n\n\n\n

5. When interest rates are raised, the cost of borrowing rises. Banks will have to pay more to borrow money, but they will charge individuals and businesses more interest. As a result, mortgage rates will rise, and fewer people will be able to purchase homes.<\/strong> The auto industry is in the same boat. Businesses will reduce capital expenditure and look for ways to spend less.<\/p>\n\n\n\n

6. This will also spark a period of slower economic growth, resulting in layoffs<\/strong>.<\/p>\n\n\n\n

<\/div>\n\n\n\n

The rate hike in the benchmark interest rates came amid record inflation in the U.S. since 1981 due to supply and demand imbalances, higher energy prices, etc.<\/p>\n\n\n\n

But based on past experiences, the sudden rate tightening can trigger a recession. A recession or slowdown is a period of declining economic performance across an entire economy lasting for several months, usually two consecutive quarters of negative growth.<\/p>\n\n\n\n

<\/div>\n\n\n\n

Indicators of Recession<\/strong><\/h3>\n\n\n\n
<\/div>\n\n\n\n

1. Decline in real GDP; Decline in Real Income; Rise in Unemployment; Decline in Consumer spending, Stagnation of manufacturing and wholesale\/retail sales.<\/p>\n\n\n\n

2. Inverted yield curve, i.e., short-term debt instruments carrying higher yields than long-term instruments of the same credit risk profile, is an important event preceding the recession. Recently, the treasury yields of 2 and 10-year bonds inverted in the USA.<\/p>\n\n\n\n

<\/div>\n\n\n\n
<\/div>\n","protected":false},"excerpt":{"rendered":"

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