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    US Fed hikes interest rates after over 3 years; how it will impact India

    US Fed hikes interest rates after over 3 years; how it will impact India

    US Fed hikes interest rates after over 3 years; how it will impact India
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    By CNBCTV18.com  IST (Published)

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    As expected, the US Federal Reserve hiked the key interest rate by 25 basis points (bps). This follows the runaway rise in prices of commodities, especially crude oil, amid the ongoing Russian-Ukraine war. Though the Fed is expected to raise rates multiple times this year, the decline in consumer spending due to higher gas prices could result in economic shrinkage.

    The US Federal Reserve, the country’s central bank, has hiked the key interest rate by 25 basis points (bps) after its two-day meeting led by Chairman Jerome Powell. The hike, first since 2018, comes on the back of shooting commodity prices, especially crude oil, amid the ongoing Russian-Ukraine war.
    An increase in rates will lead to some divestment from riskier assets like commodities and equities, especially with global markets in turmoil due to the ongoing Russian invasion of Ukraine.
    The central bank is expected to announce multiple rate hikes this year. But with consumer spending declining as a result of higher gas prices, which could result in economic shrinkage, the Fed will be more cautious before raising its interest rates.
    Impact of US Fed rate hike on India
    The changes the US makes in its monetary policy also influence Indian markets. A rate hike motivates foreign investors to pull out their money from India and other emerging markets, and divert it back to the US for more secure and safer returns.
    The shift can already be seen as foreign institutional investors (FIIs) have sold over Rs 2 lakh crore of Indian equities since October 2021, reported Business Today.
    This capital erosion leads to the weakening of the Indian rupee which recently recorded its worst-ever performance against the US dollar.
    How will India react? 
    The Reserve Bank of India, in such cases, resorts to rate hikes to stop the outflow of capital. However, the RBI has not increased rates for the 10th time in a row.
    In its last bi-monthtly meeting in February, the central bank left the key lending rates unchanged. The repo rate, at which RBI lends to banks, currently stands at 4 percent. The reserve repo rate, at which RBI borrows from banks, is 3.35 percent.
    The rates have not been increased for more than three years now. However, the US Fed rate hike and the oil shock could force the RBI to rethink its monetary policy soon.
    As the US announced its first rate hike in more than three years, India would also look to take into account the rising inflation, shooting crude oil prices, and widening trade deficit.
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