US Federal Reserve on May 1 said it is holding its benchmark rate steady after an uptick in inflation, and that it would continue to watch incoming price data before taking a call on when to cut rates. THE PREDICTIONS: The consensus view on Wall Street now is of just a single cut this year, something that could have ramifications for monetary policy decisions by other central banks, including the Reserve Bank of India (RBI). THE DETAILS Just like RBI in India, US Fed is also responsible for maintaining inflation levels in USA. What is interest rate? It is similar to repo rate ie the rate at which the central bank issues loans to the Scheduled Commercial Banks. If interest rates go up, it makes the financial instrument more attractive and urges people to park their money in them, as a result, reducing inflation.

BENEFITS TO INDIA IN CASE OF RATE CUTS

  • When the Fed cuts its policy rates, the difference between the interest rates of the two countries could widen, thus making countries such as India more attractive for the currency carry trade. The lower the rate in the US, the higher the arbitrage opportunity, till the time that the rate cut cycle starts in other economies as well.
  • A lower rate signal by the Fed would also mean a higher impetus to growth in the US, which could be yet positive news for global growth, especially when China is reeling under the impact of a real estate crisis and showing signs of slowing down.

IMPACT ON INDIA (OF INCREASED RATES BY FED RESERVE)

  • On Indian Market
    • Fed’s continuous rate hikes does not augur well for emerging markets including India.
    • An increase in US interest rates results in an outflow of funds to US markets, putting Indian stock markets and currencies under pressure.
    • Equity markets are likely to see increased volatility in the next few months.
  • On Indian Rupee
    • The outflow of funds from Indian markets will have an impact on the exchange rate of Indian rupee against the dollar. The Indian rupee has been losing value against the dollar since early 2022.
    • A weaker rupee should help Indian exporters at some-level. Nonetheless, the chances of a recession in the rich world, including the US, have gone up and that will hurt them more.