Federal Reserve Hikes Rates and Impact On India

Why in the News?

Recently, the US Federal Reserve announced its fourth consecutive 75 basis point interest rate hike.

Key Points

About

Reason for  Fed rate hike:

•  To bring inflation in line with its mandate of 2%

Impact on the Indian economy:

• The high-interest rates in the US will make Indian equities less attractive to foreign investors.
• Rupee Depreciation: The rupee will further weaken against the dollar
• Rise in Current Account Deficit: A weak rupee widens the current account deficit and makes imports dearer.
• Impact on Inflation: Depreciation of the rupee will make imports such as crude oil, chemicals, and fertilizers, dearer.
• A rise in repo rate: The aggressive rate hike by the US Fed may force the RBI to go for a sharp increase in repo rate by the RBI.