Q. The US Federal Reserve has raised interest rates subsequently. Which among the following statement correctly explains its impact on Indian Economy?
1. When interest rates rise in the US, Foreign Institutional Investors (FII) starts more investments (also called portfolio flows) into India.
2. It will strengthen Indian Rupee.
Select the correct answer using the codes given below:
- The US Federal Reserve has announced that it would end its pandemic-era bond purchases and raise interest rates subsequently.
- Both these measures are aimed at taming inflation, currently at a four-decade high of around 7%.
- This is likely to impact emerging market economies such as India.
How do US Fed actions impact India?
Outflow of Foreign Capital: When interest rates rise in the US, Foreign Institutional Investors (FII) start pulling out investments (also called portfolio flows) from India. This means foreign capital outflows can happen not only from equity but also from debt.
Impact on Rupee: FPIs pulling money out of the equity and bond markets could weaken the rupee even as the dollar gets stronger with the rate hikes.
Highest Cost of Fund Mobilization from Overseas Markets: The rise in rates also means a higher cost of funds, and fund mobilization in overseas markets will be costly. The increase in the cost of funds may not only increase the cost of capital expenditure for India but will also strain the profit margins of companies.
Source: Indian Economy (core)
