Gap widens between US, India on interest rate hikes since pandemic low

The United States central bank’s 75 basis point interest rate hike on Wednesday marks a significantly higher uptick in lending rates from pandemic lows than seen in many other countries.

The American central bank’s latest rate hike marks a cumulative 3 per cent (or 300 basis points) increase from its pandemic low. This is a higher cumulative increase than has been seen in the United Kingdom, the Eurozone and South Korea among others; including India.

India has seen a 140 basis point increase. Brazil has seen an 1,175 percentage point increase in its benchmark interest rate. It has been 325 basis points for Russia. China’s interest rates are still headed down amid economic distress. South Korea, South Africa and the United Kingdom have all seen increases of more than 150 basis points while the Eurozone has seen a 125 basis point increase (chart 1).

The analysis used data on interest rates and inflation numbers collated from the central banks of major economies.

The surge in commodity prices and supply chain issues have resulted in higher inflation across much of the globe. Europe has been seeing prices rise on higher energy costs. The latest inflation figure for the Eurozone was 9.1 per cent. It was 8.3 per cent in the United States of America (USA).

Many large economies have a higher inflation rate than India (chart 2). There have been concerns over India’s inflation index not being upgraded to reflect the latest consumption patterns.

Central banks use higher interest rates to control inflation. Inflation can broadly be defined as too much money chasing too few goods. Higher interest rates make money more scarce which reduces inflation. It can also negatively impact growth.

Sharp interest rate increases in developed markets like the USA may affect the global economy which is already facing growth headwinds, according to a September 20, Asia Pacific Insight report from global financial services group Morgan Stanley. The US Federal Reserve was seen to have signaled readiness to raise rates as high as would be required to control inflation.

“In essence this means sacrificing growth near term to bring inflation back under control, a process which runs the risk of triggering a global recession, especially when growth in the Eurozone and China is already so weak,” said the report authored by quantitative strategist Gilbert Wong and, equity strategists Jonathan F Garner, Daniel K Blake and Crystal Ng.

India’s inflation figure of 7 per cent for August was slightly higher than expected, according to a September 13 India Economic Watch report from financial services major Bank of America Corporation. The index of industrial production (IIP) and other indicators suggest a slowdown which makes the Reserve Bank of India’s September 30 decision on rate hikes all that much tougher, according to the authors.

“…inflation trajectory but doesn’t offer much comfort…activity indicators seem to be losing momentum as highlighted by the IIP data. This naturally deepens the dilemma for RBI,” said the report from BofA Securities India economist Aastha Gudwani and Merrill Lynch (Singapore) Asia and ASEAN economist Mohamed Faiz Nagutha.

They expect the RBI to raise rates by 25-35 basis points on September 30. The inflation numbers are expected to rise further to 7.4 per cent according to the duo, amid an unfavourable base effect.