Today, everyone talks about the US Federal Reserve (short “Fed”) raising the interest rate, how that will affect stocks, and if it will cause a recession in the United States. But what about the rest of the world?
Sure, the Fed just sets the interest rate for the US, but it’s a connected world—how will other countries be affected by this change? That’s why it was nice to stumble over an article discussing how the Fed’s move might affect India’s economy. Let’s look at that.
First of all, it’s important to note that the central banks of other countries often “copy” the Fed’s moves, like Hong Kong, or the Gulf States.
But what the US does affects other economies in different ways, too. How so?
While interest rates were super low in the US it made only limited sense to put your money there. You just don’t get any return on your investment. But the more the Fed raises interest rates, the less that is true. That means less money goes to middle and low-income countries like for example India.
Less money flowing into India means the Indian currency, the Indian rupee, will be worth less—it depreciates—compared to the dollar.
When does that matter? It matters when Indian companies import stuff because that stuff usually needs to be paid in US dollars. So if the rupee is worth less, imports become more expensive.
Unfortunately, India is a net importer: for May 2022 the Ministry of Commerce & Industry reported that imports were higher than exports by 24 billion US dollars. See the latest Indian trade statistics here.
What is India importing? If you look at this yearly report of the same ministry you’ll see that petro is the major import by value. And not just about everyone needs petro to move around, but it’s also used for industry, to make things. So fuel will cost more, but also prices of locally produced things might go up.
And that’s just one of the ways that the Fed hike affects a country with a strong and growing economy like India.