US Fed Rate Hike – Impact on India

March 17, 2022

In the first hike since 2018, the US Federal Reserve increased the interest rates by 25 basis points.

Reasons for US Fed Rate Hike

In February, inflation in the United States reached 7.9%, which is the highest in 40 years. The Russia-Ukraine war has also led to an increase in global commodity prices. Thus, there is upward inflation pressure. Hence, the interest rates have to be increased to reduce the money supply in the market and curb inflation. The US Federal Reserve projected that its policy rate would hit a range between 1.75% and 2% by end of 2022.

Impact on India

If the interest rates are hiked in the United States, it will make investments in the U.S. attractive as there will be higher returns. Thus, foreign investors will pull out their money from emerging markets like India and invest in the US for safe and secure returns. If the flight of capital from India continues, it will result in the weakening of the rupee against the dollar. If the rupee weakens it will result in imported inflation for India.

Impact on the RBI policy decision

The US Federal Reserve’s decision to hike interest rates will have a significant impact on the monetary policy review of RBI at the next Monetary Policy Committee (MPC) meeting scheduled in April. This flight of capital from India will put pressure on RBI to hike interest rates.

Stance of RBI

The Reserve Bank of India (RBI) continues to hold an accommodative stance. However, according to the data released by the Ministry of Statistics & Programme Implementation (MoSPI), India’s retail inflation surged to 6.07% in February. In January retail inflation was 6.01%. Thus, this is the second consecutive month that the Consumer Price Index (CPI) data has crossed the Reserve Bank of India’s (RBI) upper threshold of 6%.

If inflation continues to cross the upper threshold limit, RBI may hike the interest rates.

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