INFLATION - ECONOMY
News: Federal Reserve hikes
rates again: what it means for Indian markets, investors
What's in the news?
● On
November 2, the US Federal Reserve announced its fourth consecutive 75 basis point interest rate hike, which brought the
benchmark federal funds rate to the range of 3.75% to 4%.
● The
Fed also delivered a sharp tone in favor of over-tightening rather than
under-tightening in a bid to contain inflation, triggering a fall of 1.55% in
the benchmark Dow Jones Industrial.
Key takeaways:
● U.S
Federal Reserve raised the benchmark interest rate in its fight against inflation.
● It
also signaled plans to continue to raise
borrowing costs.
● The
US central bank has said supply-demand imbalances are causing inflation.
However, it only has the tools to control the demand side - which it is using
to bring inflation in line with its mandate of 2%.
Why is it a matter of
concern for India?
● It’s
not necessary that the RBI will blindly follow the Fed and other central banks
in raising rates. The RBI considers domestic factors, especially retail
inflation, while reviewing the interest rates. However, high imported inflation has added to the retail inflation in India,
and RBI has already raised the repo rate by 190 bps over the last six months.
● Higher
interest rates in the U.S will attract investors. Thus it led to outflow of huge capital from emerging
markets like India. This causes a blow to the stock market.
● Foreign
capital investment is imperative for India to restart its virtuous cycle. This
outflow may have its own spillover effect in capital crunch, employment
generation and pandemic affected
economic revival.
● Rate
hike will increase the demand for dollars. This led to depreciation of the Indian rupee.
○ Which
makes Indian imports costly and inflation in India.
○ When
RBI steps in to protect the rupee from severe depreciation which may lead to
declining of forex reserves.