How US Federal Reserve’s decision to raise rates may impact India

NEW DELHI: Federal Reserve interest rate increase rose a quarter percentage point on Wednesday, but showed it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets caused by the collapse of two US banks.
The move puts the US central bank’s benchmark overnight interest rate in the range of 4.75%-5.00%.
In a key shift due to the sudden debacle this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer states that “continuous rate increases ” would be appropriate.

This is the way US Federal ReserveThe decision to raise the basic interest rate may have an impact Indian economy:
When US Federal Reserve increase in domestic interest rates, the difference between interest rates of the two countries decreases thus making India less attractive for arbitrage trading, hence some money is likely to be moved out out of the Indian market and back into the US, thereby reducing the value of India’s currency against the US dollar.
The Reserve Bank of India is expected to raise the prime rate as the central bank will need to ensure that there is an interest rate differential between India and the US to attract dollars by the time India is expected. will see a record current account deficit
If interest rates in the US rise, the spread between US and Indian government bonds will narrow causing global funds to pull money out of India’s G-sec. RBI therefore will have to raise interest rates in India to prevent FPI from flowing out of the Indian bond market.

Next, FPI could start moving money from Indian markets as investments become more attractive in the US.
The above BSE Sensex benchmark fell 290 points in a volatile session to settle below the 58,000 mark on Thursday on the back of a sell-off in banking, financials and IT stocks amid a trending global stock market. Contrariwise.
“While the Fed’s decision to raise rates by 25 basis points was in line with expectations, concerns were raised by the US Treasury Secretary’s statement that universal insurance for all funds Submission is not considered.

“The domestic market managed to offset the initial losses with the help of favorable US futures contracts as the Fed hinted at a plan to pause rate hikes earlier. short-lived given the slow start in the European market due to a 50 bps rally by the Swiss National Bank,” said Vinod Nair, Head of Research at Geojit Financial Services.
(With input from agencies)


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