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When US strengthens its currency, currency value of other countries goes down. It would tell upon the buying power of the country and therefore the Economy.
We all know that the world economy in the present world is tied together, ‘You drown, you will take me with you. ‘I drown, I will take you with me’. This is very true considering the present scenario. We all know that China has devalued their currency, and the Federal Bank of America is going in for an urgent meeting on 16th and 17th September to discuss the impact of China’s action. It is expected that the meeting will be very crucial, since we learn from sources that US may change the interest rates. Any reduction or increase in the interest rates by the Federal Bank will definitely effect the global economy, needless to say Indian economy too.
We all know that the present Global economic scenario is gloomy. After China’s economic slow down and devaluation of their currency world market including India is not looking bright. There is a visible fluctuation in market rates and though not visible, the buying power is slowing down considerably. Though it is still not eminent in India, the main reason behind this is that we don’t do much business deals with China. But Indian market suffers because the Asian market as a whole is feeling this impact. Which is clearly visible, in how our currency rates are going down for the past few days.
It is in this circumstances the Federal Bank is thinking about a hike in Interest rates. Well, the obvious question which arises here is, why do they want to increase the interest rates? We all know that the Federal Bank is the Central Bank of America just like we have Reserve Bank in India. We all know about the consequences of 2008 Asian economic crisis, US too suffered then because its economy slowed down. At that time the Federal Bank purchased the bonds from the market and it paid the interest rate too to stabilise the market. It also borrowed money from World Bank, IMF and other international agencies. Once the internal economy was stabilised US stopped buying market bonds. If the Federal Bank increases the interest rates, naturally whoever takes loan will have to pay high interest rates, the result – US and US banks will make more money.
If the Federal Bank increases the Interest rates on 16/17th conference, the world economy will definitely receive a jolt, market rates will go down and people will desist bank loans. Investors and Companies will feel the pinch as the interest rates will go up for any loan they make from banks. The market rates will go up and the US investors too will feel the pinch since their returns will reduce considerably and they will try to sell their shares. This is really worrying for India because out of the 942 foreign investors in India 832 are from US. If this is not all, US will definitely want to strengthen its currency rates with increased rates for any imports made from them. This is a complex issue, US will strengthen its currency, but the worlds currency rate will go down. If the value goes down, business will go down, if the business goes down buying power goes down, the ultimate result – the economy of a country falls down.
The whole world, Korea, Europe, Japan including India has requested the Federal Bank not to go in for a interest hike. They have pointed out that the world economic condition right now is not conducive, be it developed or developing country.
If we take the case of August 2015, the period was very good for US, its unemployment rate dropped to 5.1 percent, 1,73,000 new jobs were created. It made a gain of 0.3 percent in non agricultural business. Experts believe that this encourages the US more to go all out for an increase for the interest rates, to make their presence felt strong. The Vice President of Federal Bank Mr.Stanley Fisher said in an interview “We will look into the fall of China’s economy, the overall price increase in the global economy and the world share market as a whole, before making any decision of hike in interest rates”.
Source : Navbharathtimes