Interest rates are a key tool used by central banks to manage the economy. They can be used to boost economic growth or to combat inflation.
In the United States, the Federal Reserve sets the federal funds rate, which is the interest rate that banks charge each other for overnight loans. In India, the Reserve Bank of India sets the repo rate, which is the interest rate at which banks borrow money from the central bank.
For the last three years, US interest rates have been lower than Indian interest rates. However, the US Federal Reserve has been raising interest rates aggressively in 2022 in an effort to combat inflation. As a result, the gap between US and Indian interest rates has narrowed in recent months.
The following table shows the US Federal Funds Rate and the Reserve Bank of India Repo Rate for the last three years:
The difference in interest rates between the US and India can have a number of implications for the two economies.
For example, higher interest rates in the US can lead to capital outflows from India, as investors seek higher returns on their investments. This can put downward pressure on the Indian rupee and make it more expensive for Indian businesses to import goods and services.
On the other hand, higher interest rates in India can make it more expensive for businesses to borrow money and invest. This can slow down economic growth.
It is important to note that interest rates are just one factor that affects economic growth and inflation. Other factors, such as government spending, taxes, and the global economy, also play a role.
So, The difference in interest rates between the US and India has narrowed in recent months, as the US Federal Reserve has raised interest rates aggressively in an effort to combat inflation.
This difference in interest rates can have a number of implications for the two economies, such as capital outflows from India and higher borrowing costs for Indian businesses.
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