Interest rates

Fighting inflation and interest rates: India versus the United States

By Jaspreet Singh Arora

Much has been said about the rise in interest rates this year and its direction. In this article, we will compare India to the United States and see how these two countries differ in terms of trajectory, levels and most importantly, the current position in which these countries find themselves. We also look at the most important driving force in today’s interest rate hike, INFLATION. How do the two countries fare in terms of inflation and who is best equipped to deal with it? Let’s dive!

US interest rates in an upward trend.

US interest rates were raised by 300 basis points after the pandemic and are now above their previous peak (on a 5-year basis). The Fed remains committed to meeting its CPI inflation target of 2% (8.2% in September 22). Rates are expected to reach 4% and stay there in 2023 before falling again in 2024 as inflation falls. The US 10-year G-Sec is already pricing in the expectation of future rate hikes.

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India much better placed

India has raised its repo rate by a cumulative 190 basis points since the trough of the pandemic, which is less than the cumulative rise of 300 basis points in the United States. India’s interest rate is still below its previous peak (on a 5-year basis) at this point compared to the United States. India has been able to better manage its inflation thanks to active government policy. India’s inflation rate (7.4% in September 22) is lower than that of the United States (8.2% in September 22), contrary to historical trends. Despite the rate hikes, credit growth continues to accelerate, recording 16.2% year-on-year growth in September 22 (a decade high!).

India’s CPI vs. US CPI – now vs. FY 2014-20 6-year average – trends have reversed

The United States has seen its CPI inflation soar to over 8% in each of the last 7 months, from just 0.1% somewhere at the start of the pandemic (May 20). The US CPI over the past 6 years before the pandemic (FY14-20) was also quite low and manageable, averaging 1.1%. Current levels of over 8% are also well above the Fed’s inflation target of 2%. This gives us an idea of ​​the seriousness of the situation and the need for action by the Fed in terms of rapid rate hikes. India, on the other hand, has managed its inflation quite well.

The lowest point of CPI inflation in India during the pandemic era stood at 4% (Jan 21), which currently hovers around 7%. The gap between India’s current inflation (7%) and the 6-year average (4.5%) is also not very high, compared to that of the United States. Moreover, the RBI‘s inflation target at the upper end is 6%, which makes it less daunting to bring inflation down to the target range. In fact, RBI estimates that inflation in India is expected to decline to 5.8% by Q4FY23.

Credit rates are rising rapidly in the United States

Another comparison we make is with the lending rates between India and the United States. We combine 30-year fixed mortgage rates in the United States with lending rates in India. While both have been on a structural decline since the early 1980s, US 30-year mortgage rates have nearly doubled since the start of CY22 and are at their highest level since 2007. By comparison, our lending rates are not at alarming levels.

In its latest report released on October 22, the IMF also highlighted India as a standout economy amidst the prevailing gloom in the global economy. India’s growth is underpinned by its structural reforms, the IMF said.

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The path of interest rates in India has seen a more measured rise than in the United States. Even compared on a 5-year basis, India has not yet passed the peak in interest rates while the United States has already passed its 5-year peak. India’s underlying economy is showing immense strength and poised to take off, reflected in bank credit growth at a decade high, undeterred by rising interest rates . The IMF, in its latest report, also hails India as a beacon of hope in the global catastrophe.

India has also managed its inflation better than the United States and is well equipped to contain it within the limits set by the RBI. The United States, on the other hand, still has a long way to go before bringing inflation under control. Comparing loan rates also places India ahead of the United States. The US has seen US 30-year mortgage rates double to the highest levels since 2007, while Indian lending rates are not at alarming levels.

(Jaspreet Singh Arora is Chief Investment Officer, Research & Ranking. Opinions expressed are those of the author. Please consult your financial advisor before investing)