Fed rate hike will only have muted impact on rupee: SBI report

The impact of the Federal funds rate hike by 0.25 per cent in the US will be ‘muted’ on India, according to a State Bank of India research report.

The impact on India “will be muted though the currency can take a short-term hit,’’ an internal research analysis said on Thursday.

While stating that there could be a commonality as far as fiscal stimulus is concerned between India and the US, SBI suggested India could consider pump priming, a term used for indicating stimulation of economic activity through investments.

“India could, perhaps, take the route of pump priming the economy post demonetisation, but that may be through tax cuts as it may boost consumption,” it said.

Consumption levels have come down in the recent past because of demonetisation.

In the US, too, the same view exists. In 2017, apart from Fed rate hikes, there is now almost universal consensus that the new US government will undertake fiscal stimulus.

But a fiscal stimulus through an increase in infrastructure spending rather than through tax cuts looks all the more beneficial, given that the American Society of Civil Engineers estimate a total investment of $3.6 trillion by 2020 to upgrade or improve various infrastructure assets, the report added.

SBI research has been constantly maintaining that a rate hike post US elections was the best outcome.

In doing so, the Federal Reserve recognised the considerable progress the US economy has made towards the dual objectives of attaining maximum employment and price stability.

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