Inflation in the US has hit the highest levels in four decades, and millions of Americans are struggling with rising household expenses. For 44 per cent households this means a moderate increase in prices but no lifestyle changes, but for 12 per cent the impact of inflation is severe. This has pushed the US Federal reserve to hike interest rates to a 14-year high, in order to control cash flow and reduce inflation.
Although the hike was 75 basis points as expected, it’s bound to have an impact on the global economy which is also hit by inflation. As always, the US Fed rate hike will also force other central banks globally to increase interest rates as recession threatens the world. All major economies including India also face the same situation, where they either increase interest rates or gear up for rising prices.
Effects on stock markets and consumers
Indian stock markets will be hit by the US rate hikes, since higher interest there will mean better returns on deposits for investors. This will trigger an outflow of foreign investors from Indian stock markets, since they’ll park their money in the US to benefit from better interest rates. The sell off will hurt the position of Indian equities.
For the common Indian, the interest rate hike by the RBI which is bound to follow US Fed’s move, will make loans more expensive. Businesses will also have to shell out more to lenders, and sales of high end products and services will also be hit due to lower access to credit. Less cash flow will bring down demand, and with that inflation can be kept in check. Oil prices have gone down by 1 per cent after the rate hike, but that won’t matter since fuel prices in India haven’t been lowered with the falling cost of crude this year. The Rupee’s value will continue to drop in comparison to the dollar after the US interest rate hike.
Higher interest the only way out
Not raising interest rates will mean that Indians will be headed in the direction of economic hardship that Turkey is currently facing. Under Erdogan’s regime, Turkish policy is the opposite of traditional economic rationale. Their central bank has been cutting interest rates even as inflation has soared to 80 per cent and the Lira has lost half of its value in a year. But Erdogan insists on following the same policy hoping that it will reduce inflation, and has even sacked three central bank bosses, who followed traditional economic policies, since 2019.
The rising interest rates will hamper business growth by making borrowing a costly affair, hence paving the way for a recession that the World Bank has already warned about. But that’s a storm the world will need to weather in order to protect common people from rising household expenses.
