On friday september 20, 2013, india’s central bank, the reserve bank
India’s exposure to the US interest rate may be quite significant; as a result of their trading partnership, there is likely an increase in cross-border capital flows between the two countries. This means that Indian investments could be more exposed to changes in interest rates set by the US Federal Reserve as investors seek higher yields or take advantage of lower costs of funds denominated in dollars. In turn, this could change relative real interest rates (compared to US ones) for Indian borrowers and savers.
However, due to India’s dependence on exports from other countries – including China – its relative real interest rate may remain largely unchanged despite increased exposure to US rates due to its trading partnership with America. Furthermore, if there is a negative correlation between domestic saving and investment across different countries then India’s reliance on foreign capital inflows could lead to a widening gap between domestic savings rate and investment rate. If so, it would reduce local demand for loanable funds which would put downward pressure on Indian real interest rates regardless of what happens with U.S. rates (as long as inflation remains low).
In summary, given India’s existing level of integration with other economies around the world – particularly those outside the United States – it appears unlikely that its relative real interest rate compared to US ones will materially change due solely to increased economic interactions with America through their bilateral trade partnership.