Rising Interest Rates in US and

its Impact on Developing

Economies
GROUP G7
NEEDHI NAGWEKAR(PGPM-21-029)
PRIYANK YADAV (PGPM-21-038)
 Rising interest rate in US

 Rising interest rates in US does not always lead to disastrous consequences in developing nations. If the
interest rate is rising due to rise in demand and strong economic conditions, then that creates more
opportunities for emerging economies to export their services and products into the US.
 However, lately consumer prices in US have been rising due to inflationary pressures driven by rise in food
and fuel prices. To counter the rising inflation, US has started increasing its interest rates which is creating
recessionary conditions and this is not a good sign for emerging markets.
Causes of rising interest rates

US and other developed nations have risen the interest rates due to
 Geopolitical conflicts: Russia Ukraine war led to disruption in global supply chain which
constrained the supply of essential commodities like oil, food etc.
 COVID crisis: COVID virus has wreaked immense havoc on global commerce and trade.
Lockdowns by various governments like China has led to supply side disruptions thereby
leading to scarcity of essential commodities like electronic chips.
 Impact on developing nations

 Depreciation in Currency and depletion of forex reserves: Due to rising interest rates in US and
developed nations, investors withdrew their money from the developing nations and invested it in developed
nations for better returns. This has resulted in depletion of foreign exchange reserves and depreciation of the
currencies of developing economies.
 Rising import costs: Due to depreciation in currency, it will become costly for emerging economies to
import. The current scenario of disrupted global supply chain(Russia Ukraine war) and resurgence of
COVID cases will make the matters worse.
 Increase in debt obligations: During COVID, a lot of countries relied on foreign debt(mainly US and
developed markets) for meeting their domestic needs. Such countries with a lot of debt exposure in USA are
expected to face debt crisis. As per IMF’s MD, Kristina Georgieva, 60% of low income countries are already
in or near “ debt distress”.
 Impact on developing nations

 Social impact: Loss of employment

 Economic impact: Slowing of growth and Hamper production and manufacturing
 Fiscal Deficit of Government: Increase the burden for the government through increase in interest
payments and import cost.
 Windfall gains for commodity exporting countries: Some countries which export commodities may
benefit like Nigeria(produces oil), Brazil( produces soyabean).
 Impact on Indian Equity Market

 As an example we have assessed the impact of fed rate change on Indian equity market. It can be seen that as US Fed
increases interest rate, the Indian equity market fell.

NIFTY 50
CHART
CHART
19000
18500
18000
17500
17000

NIFTY
16500
16000
15500
15000
14500
14000
2/8/2022 3/30/2022 5/19/2022 7/8/2022 8/27/2022 10/16/2022 12/5/2022 1/24/2023

DATE
Impact on Indian Bond Market

 As US Fed raised interest rates, there was flight of capital from developing markets like India to US. So in
order to prevent that and to contain inflation in developing nations, central banks in developing nations also
started raising interest rates. This rise in interest rates made new bonds more attractive and price of old bonds
began to fall. This sudden rise in demand for new bonds made people invest more in bond market than equity
market. Since the Indian bond market is underpenetrated and mostly deals in government securities, the 10
year g-sec yield increased.
 Information Technology Industry

The Covid-19 Lockdown had induced world to move into digital world which led to industries transforming and
implementing digital solutions at a rapid pace.
One major aspect of tech industry that makes them different from other industry is that they take the money from other
companies, innovate the solutions which will eventually show results in long term.
Hence, the companies have to invest now for future gains.
With interest rate rising, investors now have an options of much stable US government bonds to invest rather than a risky IT
projects/ companies.
Hence , we see a lot of volatility, lay-offs and cost-saving activities in the IT industry.
 NIFTY IT Index As per 30-Nov-22

Nifty IT Index – Nov-22

Source: https://www1.nseindia.com/content/indices/ind_nifty_it.pdf
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THANK YOU
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References

 https://www.eastasiaforum.org/2022/08/18/us-interest-rate-hikes-trample-on-developing-c
ountries/
 https://www.csmonitor.com/Business/2022/0505/How-US-interest-rate-hike-will-affect-de
veloping-economies
 https://www.forbes.com/advisor/investing/fed-funds-rate-history/
 https://finance.yahoo.com/quote/%5ENSEI/history?period1=1646092800&period2=1671
580800&interval=1mo&filter=history&frequency=1mo&includeAdjustedClose=true