US Fed raises interest rates

US Fed raises interest rates
Highlights

As expected, the US Federal Reserve has finally increased the interest rates by 25 basis points, for the first in seven years, after when the Wall Street collapsed following deep financial crisis during 2008.

The move signals end of seven-year recession

  • India well prepared to deal with the impact
  • Capital outflow is expected, though not alarming, says Rangarajan
  • CEA says India is relatively well cushioned

Federal Reserve chair Janet YellenHyderabad: As expected, the US Federal Reserve has finally increased the interest rates by 25 basis points, for the first in seven years, after when the Wall Street collapsed following deep financial crisis during 2008.

"The Federal Open Market Committee decided to raise the target range for the federal funds rate by one quarter percentage point bringing it to one quarter to one-half per cent," US Federal Reserve Board Chairwoman Janet Yellen said.

Although for months, Chair Janet Yellen and other Fed officials have said that they expected any rate hikes to be small and gradual. Further, she hints that future rate hikes may be made with low pace only after the economy shows up its strength coupled with muted inflation rise.

The federal rate is the interest rate at which one bank lends funds maintained at the Fed Res to another bank on an overnight basis. It acts as a sort of a benchmark for the interest rates that banks charge on their short and medium term loans. However, the rates on the mortgages and car loans aren't expected to rise much soon, say the analysts.

Meanwhile, the Finance Ministry said that India is well prepared to deal with the impact of the US interest rate hike. "US Fed rate hike and reference to gradualism are on expected lines. India well prepared," Economic Affairs Secretary Shaktikanta Das tweeted. While Chief Economic Advisor Aravind Subramanian says the rate hike impart will be minimal on stock markets and India is relatively well cushioned.

On the other hand, former RBI Governor C Rangarajan, who is in Hyderabad, points out that the country may see some capital outflow besides weakness in stock markets. However, he adds that the negative impact (though) is not expected to be severe.

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