The Indian economy is “very well cushioned” to absorb the impact of the US Fed rate hike, and there is no need for excessive worry, Arvind Subramanian, Chief Economic Advisor (CEA) to the Finance Ministry, has said.
“If at all there is an impact, it would only be for a short term. India will be less affected than other countries,” Subramanian said at an Assocham-organised interactive meeting on Thursday.
India’s foreign exchange reserve of over $300 billion and its strong economic growth will help weather the impact of higher US interest rates.
Asked if he expected the outflow of funds from emerging markets to accelerate following the Fed decision overnight to hike rates by 25 basis points (one quarter of 1 per cent), the CEA replied in the negative.
“Ever since the US elections, there has been a big flow of funds from emerging markets. Given that we are a bright spot, the impact on us will be much less,” he told reporters.
Subramanian said the Fed rate hike was “anticipated” and that the Reserve Bank of India (RBI) had a few days ago taken “account of this in a very sensible way”. Going forward, the RBI has indicated that it would watch the data before deciding on policy action.
Das concurs Later in the day, Economic Affairs Secretary Shaktikanta Das struck much the same tone, noting that the Fed rate hike had “ended the uncertainty” in the market. “The markets had already factored this in. We expect our stock markets, our currency markets to stabilise after some initial volatility,” he added.
Das noted that although the Fed had laid out a roadmap of three rate hikes each in 2017 and 2018, one would have to wait and see how many actually come about. “This year (2016), they (the Fed) had indicated four rate hikes, but only one happened.”
Following the Fed decision to raise interest rates for the first time in 2016, US 10-year yields reached their highest level in more than two years, and gold fell to a 10-month low.
The US dollar strengthened against most currencies, including the rupee, which fell 40 paise to close at 67.8350 to the dollar, against 67.44 previously.
Vaibhav Agrawal, Head of Research & ARQ, Angel Broking, said, “The Fed’s signal to raise rates three times next year is faster than market expectations. This is likely to push up US rates faster, and put pressure on the Indian rupee. The domestic markets may remain volatile for some time with the expectation of rising US rates and the impact of demonetisation.”