The US Federal Reserve (the country's central bank) has recently hinted at a rate hike. The Indian markets have reacted with trepidation as a result of this.
Key Points
The Federal Reserve and Indian Markets are linked: Emerging economies, such as India, have greater inflation and interest rates than developed economies, such as the United States and many (mainly Western) European countries. As a result, financial institutions, particularly Foreign Institutional Investors (FIIs), would prefer to borrow money in the United States at low interest rates in dollars and then invest it in emerging-market government bonds in local currency terms to earn a greater rate of return.
When the US Federal Reserve boosts its domestic interest rates, the interest rate differential between the two countries narrows.
As a result, India will be less appealing to currency carry traders, and some money will likely migrate out of the Indian markets and back to the US.
Impact of rise of Interest rates on India:
Rise of Bond Yield: On the stock market, bond yields will climb as the global dollar shortage worsens.
Fall in the Market: Due to the strong dollar and the uncertainty created by the trade war between the United States, China, the European Union, and other The US Federal Reserve (the country's central bank) has recently hinted at a rate hike. The Indian markets have reacted with trepidation as a result of this.
On Export and forex:
On export and forex, India is one of the world's largest crude oil buyers.
A weaker rupee versus the dollar means more expensive crude oil imports, which might lead to cost-driven inflation across the economy, particularly in sectors that are highly vulnerable to crude oil price swings.
On the other side, India's exports, particularly IT and IT-enabled services, may profit to some extent from a stronger dollar against the rupee.
However, the same gain may not completely accrue to exporters due to severe rivalry in the export market.
