The federal funds rate is one of the U.S. Federal Reserve’s key tools for guiding U.S. monetary policy. It impacts everything from the annual percentage yields you earn on savings accounts to the rate you pay on credit card balances, which means the fed funds rate effectively dictates the cost of money in the U.S. economy. The Federal Open Markets Committee sets the federal funds rate—also known as the federal funds target rate or the fed funds rate—to guide overnight lending among U.S. banks. This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. It’s set as a range between an upper and lower limit. The federal funds rate is currently 5.25% to 5.50%.
When the Fed raises the rate, it is aiming to boost shot-term borrowing cost, making loans expensive for everyone. This helps to subdue rising inflation by reducing the amount of money flowing through the economy. The opposite effect is achieved when the rates are lowered. As credit becomes available at cheaper rates, supply of money increases and hiring booms as companies are able to grow cheaply.
The rate actions of the US federal Reserve impact the Indian economy in several ways due to linkages of currency, investment and trade. A swing in either way can translate to many kinds of effects in India's economy. The US Fed cutting rates draws positive reaction from India due to an overall positive impact.
When the US Federal Reserve cuts interest rates, it makes investing in the US less attractive. This prompts foreign investors to look for better returns elsewhere, like in India, where interest rates are comparatively higher. As a result, more foreign money flows into Indian markets, giving them a boost. Foreign institutional investors, who had left when US rates were rising, are now likely to come back to the Indian markets. Lower US interest rates mean more dollars circulating globally. For India, this could mean a stronger rupee and a lower import bill, especially for oil. This is crucial for India, which imports over 80% of its oil. A stronger rupee helps control inflation by reducing transportation costs and makes it cheaper for India to repay foreign debt. If the US Fed continues to cut rates, India's central bank, the RBI, might also lower rates, benefiting the global economy and boosting demand.
The sign of lower US rates suggests more dollars coming in, pulling in investments to Indian markets. This boosts business activity as Indian companies receive more funds. The US Fed's shift to lower rates is positive for Indian startups, which struggled during rate hikes. A stronger rupee can impact exporters, but it benefits businesses reliant on imports, making raw materials and subsidiary goods cheaper. Additionally, foreign travel and education loans become more affordable. These rate cuts could be a portent of positive times ahead for the Indian Economy.
