US Fed Raises Interest Rates By 25 Bps For First Time Since 2023; What It Means For Indian Rupee, Stock Markets

The US Federal Reserve has raised interest rates by 0.25 percentage points today, marking its first interest-rate hike since 2023, a move that could have implications for India. The Fed raised rates by 25 basis points amid ongoing inflation and higher energy prices, maintaining pressure for tighter monetary policy.

The Federal Reserve raised interest rates on Wednesday and flagged further increases in borrowing costs in the coming months, with new US central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration's inability so far to control inflation, Reuters reported.

Also, it's the first policy shift under the new Fed chief, who took office in late May after being selected by US President Donald Trump with the expectation that he would cut rates.

But now, what does it mean for India? A higher US interest rate could make American investments more attractive, potentially drawing money away from emerging markets including India and putting pressure on the rupee, stocks, and inflation.

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The Fed's 25-basis-point rate hike does not automatically mean that Indian stocks will fall, the rupee will weaken sharply, or the RBI will raise rates.

Here are some important factors:

- Foreign investment and Indian stock markets

When US interest rates rise, investments in US assets can become relatively more attractive. Global investors may therefore choose to allocate more money to US assets and reduce their exposure to emerging markets such as India.

This could affect foreign portfolio investment flows into Indian equities. If foreign investors sell Indian shares and convert their rupees into dollars, it can put pressure on both the stock market and the rupee.

- Pressure on Indian rupee

A higher US interest rate can support the dollar because investors may find dollar-denominated assets more attractive.

This could directly put additional pressure on the Indian currency.

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- RBI interest rates

A US Fed rate hike does not automatically mean the Reserve Bank of India will raise its own interest rate. The US Fed and India's RBI make their decisions based on their respective economies.

The RBI will primarily consider India's inflation and economic-growth outlook. However, if a weaker rupee and expensive oil cause Indian inflation to rise, the RBI may have less freedom to cut interest rates and could consider raising them if inflation remains persistent.

Higher RBI rates would mean more expensive loans for households and businesses.

- Inflation

The biggest concern for India is the combination of a weaker rupee and high crude oil prices.

India imports a large proportion of its crude oil requirements, and oil is priced internationally in US dollars. Therefore, if the rupee weakens, Indian buyers need to spend more rupees to purchase the same amount of oil.

If crude oil costs 100 dollars a barrel:

At Rs 90 per dollar, it costs Rs 9,000.
At Rs 96 per dollar, it costs Rs 9,600.

So even if the dollar price of oil remains unchanged, a weaker rupee increases India's import bill.

- Borrowing Costs

Indian companies that borrow money in US dollars or other international markets could face higher borrowing or refinancing costs.

This could be particularly relevant for debt-heavy businesses such as infrastructure companies.