India's interest rates now aligning with U.S, Euro cycles

By agencies   |   Friday, 12 May 2006, 07:00 Hrs
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NEW DELHI: IndiaÂ’s interest rate movements are getting more aligned with the global interest rate cycle, especially with the U.S. economy. There are also indications of this trend continuing with the Euro zone as well. Strong economic growth, surplus liquidity and expected inflationary pressures have been the key reasons for this alignment in global interest rates.

For instance, in the last two years, the Federal funds rate has increased by 400 Basis Points; the Reverse Repo Rate (RRR) has risen by 200 basis points and the Euro main refinancing operations rate has increased by 50bps. Globally, this clearly illustrates how interest rates are moving in tandem.

Rising energy prices and their impact on inflationary pressures have been the major reasons for upward movements in short-term interest rates globally, especially in oil importing economies like India and the U.S.

Furthermore, the Reserve Bank of India (RBI) has continuously kept interest rates above the levels of the U.S. and other G-7 countries, so as to attract more capital inflows into the Indian economy.

The increases seen in the Fed funds rate were carried out in response to the rising growth seen in the economy and also to curtail inflationary pressures. Lower national savings in the U.S. economy were the other major reasons for the rise seen in the Fed funds rate. The increase in the Euro refinancing operations rate was mainly on account of the recent increase in economic growth, and fear of higher oil prices turning inflationary.

In fact, as of week ended April 22, inflation increased by 3.55 percent over the same period last year. ItÂ’s clear that rising prices in the economy have only partially passed onto the wholesale price index. Going forward, there are concerns that higher commodity prices, particularly oil prices, could lead to higher inflationary pressures in the economy.

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