Budget 2023: Know what your interest rates have to do with western countries

If you are not an economist, then you must be thinking that why the economic fear prevailing in the countries of Europe and the panic created after the recession in America is disturbing your life. Here is the answer…

Recently, Himachal Pradesh is the newest state to implement this system.

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R Sreedharan, Union Budget: Last year, the Reserve Bank of India increased interest rates 5 times. Interest rates (repo rate or interest rate at which RBI lends to commercial banks) were 4 per cent at the beginning of 2022. But when the year ended, the interest rates were at 6.25 per cent. While rising interest rates are beneficial for depositors, it is dire for borrowers, be it retail consumers or large corporates. When debt becomes costlier, people want to borrow less and spend less. It slows down the pace of the economy, affecting jobs, wages and tax collections of the government.

In such a situation, the question arises that why did the RBI increase the interest rates so many times last year? It is related to the happenings in big and developed economies, especially in Europe and America. Two major events of the last few years have disrupted the smooth functioning of world economies. One of these is the Kovid epidemic, due to which there was a huge disruption in the supply chain. The second major reason is the Russia-Ukraine war which increased energy prices.

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To a large extent, the disruption in the global supply chain was because China remained in lockdown due to its ‘Zero Covid’ policy. This created a shortage of supply, resulting in increased prices. Meanwhile, used car prices rose for a while in the US because new cars weren’t being produced fast enough due to chip shortages. Inflation started increasing wildly due to the increasing expenditure on energy because everything in the economy needs to be spent on shipping. This also includes the cost of traveling to and from work. When the prices become heavy on the pocket, people start complaining and look towards the government for relief.

So central banks in both Europe and the US raised interest rates in the hope that the costlier debt would reduce consumption. In fact the US Federal Reserve seems prepared to deal with an economic downturn so that job creation slows down and people automatically spend less.

All this is fine, but why is it affecting your life? Regrettably we live in a global world where all the economies are interdependent and hence interlinked. Apart from our domestic savings, we need capital from abroad to meet our huge investment requirements in industry and various types of infrastructure. When interest rates start rising in developed economies like the US, their bonds become more attractive with less currency and country risk.

An investor investing in India says that earlier the interest rates in the US were very low and in a growing market like India, despite the currency risk, there were possibilities of better returns. Because of this, any investor who came to India suddenly takes a U-turn. Therefore, to keep India attractive for investment, RBI should increase interest rates so that the difference between our interest rates and US interest rates remains large. After all if the interest rates on Indian bonds versus US bonds weren’t high enough, why wouldn’t anyone buy safe US bonds, right?

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The downside of western countries slowing down their economies is that our own export-oriented industries will also feel the brunt. But on the contrary, we will benefit from cheaper oil prices as we import almost all of our energy needs. So overall our economic engine should be running with our large domestic consumption. In this context, if Finance Minister Nirmala Sitharaman presents the Union Budget on February 1 and is unable to fulfill all your expectations, then keep your sympathy towards her. After all, she walks a fine line between populist policies and fiscal prudence.