Managing Director of Kotak Mahindra Bank, Uday Kotak on Thursday made very sensational statement regarding how US Federal Reserve was controlling monitoring policies in other economies indirectly.
According to Uday Kotak, the central banks which do not follow policy similar to the US Fed will see their currency being crushed. He quoted the example of Japanese yen. Local currency of Japan, Japanese yen, diminished by more than 30% as they were not ready to follow the policies put forth by the Federal Reserve.
Central bankers globally move in a herd led by ring master the US Fed. Whether easy or tight money. Go out of line your currency is crushed. Look at Japan, a 30 plus percent depreciation. That’s the power of the US $ the most sought after asset in the world today. How long?
— Uday Kotak (@udaykotak) July 19, 2022
Bank of Japan has so far avoided taking rigorous measures to cop up with the effects of inflation. The central bank of Japan is of the view that weakening Japanese yen would increase the Japanese gross domestic product (GDP) by a considerable margin.
Uday Kotak said that the central banks of economies move like a herd, which is led by the US Fed. US Fed acts as the ring master, and if any Central Bank tries to move away from the herd, their local currencies will plunge beyond expectations.
As inflation in the United States reached a record high in 41 years, Federal Reserve of the United States decided to stiffen its monetary policy. This stiffening in monetary policy was supposed to decrease the inflation in the country and give a breathing space to the economy. In order to achieve this, the Federal Reserve increased its benchmark interest rate by 150 basis points.
The activities of the Federal Reserve to keep a check on inflation commenced in December last year, when monthly asset purchases steered by the central bank of the United States got declined from 120 billion dollar to 105 billion dollars.
Just last month, the Federal Open Market Committee of the Federal Reserve raised their interest rate by 0.75%. This was in addition to a 0.5% increase in May 2022.
Sketching the trend followed by the US Federal Reserve and other major Central banks in the world, the Reserve Bank of India increased its benchmark interest rate in May by 40 basis points. The repo rate was again modified by the Reserve Bank in June as the rate saw an increase of 50 basis point.
‘When US economy suffers, the world suffers’
The notion that ‘when US economy suffers, the world suffers’ has begun to work in the global economy again as the US Federal Reserve is planning to tighten its monetary policy in the upcoming future. This has led to an increased outflow of foreign institutional investors and foreign capital from various economies.
India has also been affected by this as various foreign institutional investors decided to keep selling their shares in the stock market last week. When foreign investors back out from emerging economy such as India, it puts negative pressure on the local currencies of those emerging economies.
The Indian rupee has so far depreciated nearly 7.5% against the US dollar in 2022. The Indian rupee also during this time touched the lowest level of 80 per US dollar for the first time in its history.