InvestorQ : How do you see the impact of UK central bank raising rates on Indian markets?
ishika Banerjee made post

How do you see the impact of UK central bank raising rates on Indian markets?

3 weeks ago

Now hawkishness is rampant and after the ECB and the US Federal Reserve, even the Bank of England has raised rates by 75 basis points taking the rates from 2.25% to 3.00%. Incidentally, this happens to be the sharpest spike in rates by the Bank of England since 1989 and this kind of aggressive hawkishness comes at a time when the British economy is battling against an impending recession. Despite the efforts till date, the inflation level refuses to come down. The rate hike led to the UK Pound falling sharply by 2% against the American dollar as the UK Pound does not have the privilege that the US dollar has.

However, what worried the markets was the fact that it was not confident like the Fed. In fact, the Bank of England was ambivalent about how successful it would be in containing inflation. If you go by the statement issued by Bank of England, it says “We cannot make promises about future interest rates but based on where we stand today, Bank Rate will have to go up by less than currently priced in financial markets”. In short, the Bank of England is ambivalent about the impact it would have on GDP growth, after 1 quarter of contraction already. Also, they are not sure if inflation would really be controlled.

As Rishi Sunak takes charges, there are some key questions for India. Will the trade deal go through amidst such tough conditions? What happens to the fact that India runs a trade surplus with the UK? Also, Indian companies are some of the largest investors in the UK and that is under stress. Above all, UK has been a preferred place for Indian companies and it is not clear whether an inward looking policy will change the equations. If the situation gets too tight, it may kill growth without having an impact on inflation. That is what India would be more worried about in its own interests.