US Fed Reserve raises interest rates by 0.25% on 16th December – its first increase since 2006. The hike, announced after a meeting of the Fed Reserve’s top policy-making body on Wednesday . This move likely to make major impacts on all economies including developed and developing countries. This mean higher borrowing costs for developing economies, many of these countries are already experiencing slower growth rates or recession (except countries like India).
Increase in interest rates will strengthen US dollar while the other currencies have to suffer. The US central bank raised projection for its economic growth next year slightly, from 2.3% to 2.4%. Higher interest rates will make the US markets more attractive for foreign investors. After the announcement from Federal Reserve, the Dow Jones went from a 50-point rise to 224 points and closed at 17,749 points, a 1.3% gain.
Indian Rupees currently trading at 66 for a dollar could fall to below 70 to a dollar. Other currencies won’t spare! They also have to face the same fate. Shaky share markets are expected as an after effect of this interest hike. Countries like India fear about inflation and costlier imports.
Rising US interest rates could mean higher debt repayments for emerging market governments and businesses – as the amount owed is denominated in dollars. But, the stronger dollar which has followed the rise might be good for European and Asian economies as it means exports to America are cheaper.
US Fed Reserve raises interest rates – impact on India
- BSE SENSEX, NIFTY stock markets and currency have been nervous to the Fed’s announcement. They may suffer short-term loses. High-volatility trading across financial markets is imminent.
- Imports become costlier. Although oil prices are at record low, weakening Indian Rupee will not give the full advantage of that to oil companies.
- Inflation will be a problem. RBI may be hesitant to cut interest rates further.