Indian Rate Increase Sends Shockwaves

The Indian government last Friday made a decision that sent shock waves around the world markets.

At the outset, it looks trivial – just a quarter of a percentage rise in key interest rates by a developing country.

India’s central bank, the Reserve Bank of India, raised the so-called the repo rate – which is the rate at which the bank lends to financial institutions – to five percent, and similarly increased the reverse repo – the borrowing rate – to 3.5 percent.


It was an unexpected move. RBI officials have been quoted as saying that they had to undertake this in view of the rising inflation. Besides, Indian officials also point out that the economic recovery is strong and sustained enough for them to think about such a move.

The unexpected move sent shockwaves westwards. Europe’s Stoxx Europe 600 index dropped by 0.4 percent, and in New York the Dow Jones also saw a drop.

The hardest hit were commodities, as India, along with China, is a major consumer of raw materials. In fact, commodities majors hope that the fast growing economies of India and China will offset the slow growth in demand in the west this year.

And in New York, gold futures dropped by almost twenty dollars while oil dropped by $1.52.

Experts say the rate raise by Asia’s third largest economy (after China and Japan) might signal of things to come: Australia has already increased its key lending rates and China has been reigning in lenders to keep a tight least on the inflation.

And if the current economic recover trends continue, governments and central banks throughout the world might be forced to raise the interest rates, which are held at historical lows to stimulate growth.

And in India, there are also indications the government is in a rush to end the stimulus program, much to the chagrin of the country’s industrial leaders. And, again, there is a similar push in other countries too to end the stimulus funding.

In conclusion, the reaction to Indian rate rise is not only a sign of how inter-connected the world is, but also the power of countries such as India and China.

One wonders how the world would react if the Chinese implement a similar rate increase!

Comments

  1. Indian rate increase sends shockwaves.. Slap-up 🙂

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