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

NEW DELHI: The Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, but indicated it was on the verge of pausing further increases in borrowing costs amid recent turmoil in financial markets spurred by the collapse of two US banks.
The move set the US central bank’s benchmark overnight interest rate in the 4.75%-5.00% range.
In a key shift driven by the sudden failures this month of Silicon Valley Bank (SVB) and Signature Bank, the Fed’s latest policy statement no longer says that “ongoing increases” in rates will likely be appropriate.

Here is how the US Fed‘s decision to hike key rate may impact Indian economy:
When the US Federal Reserve raises its domestic interest rates, the difference between the interest rates of the two countries decreases, thus making India less attractive for the currency carry trade, consequently, some of the money may be expected to move out of the Indian markets and flow back to the US, therefore decreasing the value of India’s currency against the US dollar.
The Reserve Bank of India is expected to hike key rates as the central bank will need to ensure that there is an interest rate differential between India and the US to attract dollars at a time when India is expected to witness a record current account deficit
If interest rates in the US increase, the spread between US and Indian government bonds will narrow causing global funds to pull money out of Indian G-secs. RBI will therefore have to raise interest rates in India to prevent FPI outflows from Indian bond market.

Next, FPI may start moving money from Indian markets as investments become more attractive in the US.
The BSE-benchmark Sensex on declined 290 points in a volatile session to settle below the 58,000 mark on Thursday due to a sell-off in banking, financial and IT stocks amid a mixed trend in global equities.
“Although the Fed’s decision to increase rates by 25 basis points was in line with expectations, concerns were raised by the US Treasury Secretary’s statement that blanket insurance for all deposits was not being considered.

“The domestic market attempted to recoup its initial losses with the help of favourable US futures as the Fed hinted at its plan to pause rate hikes sooner. However, the recovery was short-lived due to a sluggish start in the European market led by a 50 bps hike by the Swiss National Bank,” said Vinod Nair, Head of Research at Geojit Financial Services.
(With inputs from agencies)