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US Fed’s 75 bps interest rate hike pushes Indian rupee to fresh lows

Petrochemical industry | 22 Sep 2022 13:05 IST | Polymerupdate.com

Continuing its hawkish stance, the United States’ Federal Reserves (US Fed) on Wednesday raised its key policy interest rates for the third consecutive time in a row by 75 bps in an ongoing effort to bring down inflation. Starting with a 25 bps hike in March this year, the US Fed raised the interest rate by 50 bps in May, followed by 75 bps hikes at the June and July meetings, thus taking the present policy rate in the range of 3-3.25 percent and indicated for further jumbo hikes in the months to come.

US Fed’s interest rate hikes prompt overseas investors to pull out funds from emerging economies and invest in the US Treasury for better profits. As an immediate impact, the Indian rupee plunged to hit an all-time low of 80.74 against the dollar in Thursday trade with further downward pressure seen likely. The record depreciation in the rupee is all set to benefit exporters to get a proportionate increase in their receivables, but importers would have to cough up more money in local currency to procure goods from overseas. Overall, the depreciating rupee is an unhealthy sign for the Indian economy as it always supports inflation.

ON THE RISE

US Fed’s interest rate hikes in 2022

Month

Rate ( basis points or bps)

March

25

May

50

June

75

July

75

September

75

Source: FOMC statements, Conversion: 100 bps = 1%


The interest rate hikes were prompted by escalated retail inflation in the United States due primarily to supply disruptions that emerged after Russia started an invasion of Ukraine in February this year and continuing even today without any forecast for its end. The war created a global energy crisis and pushed a significant part of Europe into darkness as a number of countries in the European continent were dependent upon Russian energy. Several factories in Europe were rendered jobless and were forced to shut down due to the energy crisis.

The United States was not immune to the global energy crisis emanating from the Russia-Ukraine war. In the United States, inflation remained well above the policymakers’ target of 2 percent. Over the last 12 months ending July, the total Personal Consumption Expenditure (PCE) Price Index, known as Consumer Price Index or retail inflation, rose to 6.3 percent, excluding the volatile food and energy categories and core PCE prices rose to 4.6 percent. In August, the 12-month change in the Consumer Price Index (CPI) stood at 8.3 percent, and the change in the core CPI was 6.3 percent.

“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. In addition, we are continuing the process of significantly reducing the size of the balance sheet. The US economy has slowed from the historically high growth rates of 2021, which reflected the reopening of the economy following the pandemic recession. Recent indicators point to modest growth in spending and production. Growth in consumer spending has slowed from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial conditions,” said US Fed Chair Jerome Powell.

Powell further added that activity in the housing sector has weakened significantly, in large part reflecting higher mortgage rates. “Higher interest rates and slower output growth also appear to be weighing on business fixed investment, while weaker economic growth abroad is restraining exports. As a consequence, FOMC participants have marked down economic projections of the United States with the median projection for the real GDP growth standing at just 0.2 percent this year and 1.2 percent next year, well below the median estimate of the longer-run normal growth rate,” he added.

Meanwhile, price pressures remain evident across a broad range of goods and services. Although gasoline prices have softened in recent months, they remain well above year-earlier levels, in part reflecting Russia’s war against Ukraine, which has boosted prices for energy and food and has created additional upward pressure on inflation.

In the September meeting, the US Fed raised the target range for the federal funds rate to bring the target range to 3-3.25 percent. With the US Fed signaling more such large increases in the future, the policy rate may rise to 4.4 percent by the end of the current year and further to 4.6 percent in 2023 to battle continued strong inflation.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com
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