Sansad TV Perspective: US Fed Rate Hike

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: US Fed Rate Hike.

Anchor: Vishal Dahiya

Guests:

1. Jayant Dasgupta, Former Ambassador, WTO
2. Prof. Charan Singh, CEO, EGROW Foundation
3. A.K. Bhattacharya, Editorial Director, Business Standard

Context: United States Federal Reserve has increased interest rates.

Highlights of the discussion:

• Introduction.
• Background details.
• Impacts of Interest rates high.
• Impact on Indian Economy.
• Way Ahead.

Introduction:

• To tackle high inflation, the United States Federal Reserve has raised its key interest rate by substantial three-quarters of a point for a third straight time. 
• US Fed’s recent move boosted its benchmark short-term rate which has effects on consumers and business loans, to a range of 3 percent to 3.25 percent. 
• It also signaled more significant increases in new projections showing its policy rate rising to 4.40% by the end of this year before topping out at 4.60% in 2023 to battle continued strong inflation. 
• Central banks across the world are also hiking rates in an attempt to tackle inflation. At least 75 central banks have lifted their benchmark interest rates in the past year, increasing the price of credit across the world. 

Background Details:

• The Global economy is experiencing inflation due to multiple reasons like the COVID-19 pandemic, the Russia-Ukraine war, etc. The inflation which was usually around 2% has increased to 9-10% in countries like the United States and European countries.
• The Balance sheets have expanded four to eight times exceeding their tolerance limits.
• The United States Federal Bank has adopted such a policy because the country is experiencing four-decade high inflation. Similarly, other countries are also reeling under high inflationary pressures, including advanced economies like England. Inflation has reached a double-digit figure in England.
• Presently there are about 90 central banks that have increased their rates and fifty percent of them have gone by 75 basis points. 
• Globally, the banks are following policies that are in contrast to the earlier days of easy liquidity, low-interest rates, etc.
• All these trends have pinched the general public and the policymakers, further reducing the scope for easy monetary policies completely.

For more information on the US Fed interest rate hike, read here: UPSC Exam Comprehensive News Analysis. Sep 24th, 2022 CNA. Download PDF

Impacts of Interest rate hikes:

• The US interest rate hike will have an impact on US markets, debt and equity markets, etc.
• It will have spillover effects on the global economies, particularly emerging economies.
• If the recent trend is followed in an aggressive fashion, there could be a reduction in wages and a rise in the unemployment rate. This was also observed in the US that despite the three consecutive raises of interest rates, the employment rates have not gone up.
• Moreover, effects can also be felt in economic growth, and exports of other countries. The world is on the brink of recession and the current slowdown can further worsen the situation.
• Spillover effects can take place through different channels like trade, commodity prices, sentiments, and capital flows.
• The recessionary trend in most advanced economies of the world means nearly 60% of the GDP will be impacted.
• All the individual countries will have to face their own sets of challenges.

Impact on Indian Economy:

• With the US increasing its rates and coming closer to Indian interest rates, the arbitrage that the Foreign Portfolio Investors were getting by investing in the Indian stock market will become non-attractive.
• There would be an outflow of foreign currency from India and people are more likely to invest in US equities and US Federal securities.
• With an outflow of funds, there would be pressure on the currency market.
• As India is not completely integrated with the global economy, so there is a bit of cushion in terms of adverse impacts. But, the Indian stock market will have a bit of a downturn.
• The equity market of the country will have to face a prolonged phase of volatility, as the Indian economy is dependent on a large share of foreign flows.
• The export sector will have to face large-scale impacts:
  • Exports of goods will be drastically reduced as the two major export markets for India are the USA and Europe.  The signs are very much evident in the share of goods exported.
  • In terms of service, especially Software services will see signs of a slowdown.
• If there is pressure on the currency, capital goods would become dearer, thereby creating pressure on the investment. There could also be a restrictive influence on new sectors of investment.
• However, inflationary pressures in India will not be a major concern as India is not majorly an import-dependent country as far as consumption is concerned.

Positive impacts on the Indian Economy:

• A recession in the global economy will also mean a reduction in commodity prices, particularly crude oil.
• This in turn will reduce the current account deficit and the Indian external sector will probably be in a better position to tackle the crisis.

Way Ahead:

• Advanced countries need to sober down on their aggressive stance and have a responsibility towards the poor countries of the world.
• Multilateral institutions like World Bank and International Monetary Fund(IMF) should come forward and get all countries on board in tackling the economic slowdown. IMF can play a crucial role in gathering financial resources and helping underdeveloped countries.
• The measures that India can adopt:
  • The Indian government should expand food support to vulnerable sections.
  • The Reserve Bank of India(RBI) will also have to consider raising the interest rates.
  • RBI also needs to follow an accommodative stance in terms of Balance sheet issues and help the corporate sector.

Conclusion:

The high inflationary trend across the world shows tough times ahead and a cautious approach is needed to be followed both by the developed as well as developing economies. The underdeveloped countries need to be watchful and multilateral institutions should also take positive steps to tackle the slowdown.
Read all the previous Sansad TV Perspective articles in the link.

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