By Prarthana Mitra
The United States central bank increased lending rates by 25 basis points on Thursday amidst market turmoil all over the world. Citing improvement in employment and economic operations as reasons, this is the third interest hike imposed by the US Federal Reserve in the current fiscal year.
The US interest rate will be increased to a target range of 1.5% to 1.75% following the first meeting between Federal Reserve officials and their new chairman Jerome Powell.
Effects of a quarter-point increase
Both Indian and US stock markets were operating with high tensions as the anticipated hike would broaden the gap between the currencies.
With the value of the US dollar surging upwards, the Indian currency could be considerably weakened, thus hurting Indias forex reserves and imports. While this may be good for Indian exports, dwindling global demand and stiff competition may further prevent Indian exporters from capitalising on this discrepancy.
Will the hike affect foreign investment flows to India?
The rupee, which has strengthened a bit lately, came under pressure post the hike and is currently hovering somewhere around 64.50 levels against the US dollar, in the fourth quarter of this fiscal year. This could have served as the trigger for a lot of foreign funds and companies to exit the country and return once the economy has stabilised.
Higher interest rates in the United States are usually followed by an outflow of foreign funds from upcoming economies such as India, which are considered to be ‘risky.’
Moreover, with President Donald Trump’s announcement of tariffs of 25% and 10% on steel and aluminium, trade war threats are looming and may further impinge on the way foreign investors allocate funds for emerging developing economies.
Powell also expressed his concerns about the possibility of a trade war at the end of the Fed’s two-day meeting.
“They’re (business leaders and bankers) seeing it as a risk to the outlook,” Powell said.
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Pankaj Pandey, research head at ICICI Securities added in an interview with LiveMint that he thinks political anxiety will also play a huge role in keeping markets in a tight range.