The Bank of Japan is set to increase interest rates to the highest level since 1995. The Federal Reserve of the US is also contemplating the idea of increasing rates, as it is difficult for the Fed to tame inflation below 2%. The European Central Bank has already increased the interest rate by 25 basis points from 2% to 2.25%. Other developed economies are expected to follow sooner or later.
India is already in a difficult position with spiralling inflation due to increased fuel prices, falling rupee, widening current account deficit and falling forex reserve. Monsoon is also expected to remain weaker this year. A weak monsoon will negatively affect the hydropower generation as well as farm earnings, adding to the problems for India.
Despite a possible US-Iran peace deal this week, the uncertainties still loom larger over the opening of the Strait of Hormuz. Rising interest rates in Japan, the US, the EU and other developed economies are a cause of concern for India. This will lead to flight of capital from Indian markets, resulting in increased pressure on the Indian rupee as well as the equity market in India.
It must be noted that returns from Indian equities in the last year have been historically very low. Rising interest rates in developed economies and a falling rupee make investing in the Indian equities market completely unattractive for international investors. Rather, it is panelising for them.
So any interest rate increase in developed economies will increase pressure on India in many ways. RBI may also be forced to increase rates in India even if the rising inflation is caused by a supply-side bottleneck.
This is like another negative news coming from across the table. Though the ride would be a bumpy one, the positive news is that India is expected to grow by about 6% despite all problems.
India is already in a difficult position with spiralling inflation due to increased fuel prices, falling rupee, widening current account deficit and falling forex reserve. Monsoon is also expected to remain weaker this year. A weak monsoon will negatively affect the hydropower generation as well as farm earnings, adding to the problems for India.
Despite a possible US-Iran peace deal this week, the uncertainties still loom larger over the opening of the Strait of Hormuz. Rising interest rates in Japan, the US, the EU and other developed economies are a cause of concern for India. This will lead to flight of capital from Indian markets, resulting in increased pressure on the Indian rupee as well as the equity market in India.
It must be noted that returns from Indian equities in the last year have been historically very low. Rising interest rates in developed economies and a falling rupee make investing in the Indian equities market completely unattractive for international investors. Rather, it is panelising for them.
So any interest rate increase in developed economies will increase pressure on India in many ways. RBI may also be forced to increase rates in India even if the rising inflation is caused by a supply-side bottleneck.
This is like another negative news coming from across the table. Though the ride would be a bumpy one, the positive news is that India is expected to grow by about 6% despite all problems.
Rajeev Upadhyay
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