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US Fed raises key interest rate: Why it is not a good news for India

The US Federal Reserve’s decision to raise interest rates could not have come at a worse time for India especially because the statement says there will be more increases in 2017.

business Updated: Dec 15, 2016 14:32 IST
Suveen Sinha
Federal Reserve Chair Janet Yellen speaks during a press conference following the announcement that the Fed will raise interest rates, in Washington.
Federal Reserve Chair Janet Yellen speaks during a press conference following the announcement that the Fed will raise interest rates, in Washington.(AFP)

The United States Federal Reserve’s decision to raise interest rates by a quarter point around midnight on Wednesday (India time) could not have come at a worse time for India --- especially because it was accompanied by a statement that there will be more, and faster, increases in 2017.

Higher interest rates in the US will make capital more costly, and affect Indian companies that hope to get funds from there. Simultaneously, it will lead to a movement of capital out of India and other emerging markets in search of the higher yields in the US.

This comes as yet another setback for the Indian economy which, grappling with the effects of the demonetisation, is facing uncertain times. Several agencies, including the Reserve Bank of India, have already reduced their projections of growth for the country’s GDP.

Highlights
  • Higher interest rates in the US will make capital more costly, and affect Indian companies that hope to get funds from there
  • It will lead to a movement of capital out of India and other emerging markets in search of the higher yields in the US
  • The rise of oil prices, as a direct impact, means a rise in motor fuel prices. Indirectly, it will cause a rise in prices all-around, because a lot of goods move on trucks.
  • More than 1 million IT jobs will remain vacant in the US because there is no candidate to fill them

Of late, bad news has come in a torrent. The United States president-elect, Donald Trump, said he won’t allow H1B visa holders to replace US workers. Crude oil prices touched $57 a barrel, their highest in a year and a half. And India’s factory output shrank 1.9%.

Last year the seven largest Indian IT companies got nearly 15,000 of the 85,000 H1B visas approved by the US, more than any other country. A person can go to work in the US on this visa.

The rise of oil prices, as a direct impact, means a rise in motor fuel prices. Indirectly, it will cause a rise in prices all-around, because a lot of goods move on trucks. And the IIP dip in October is ominous because the predictions for November, thanks to demonetisation, are already dire.

“The short term looks troubling,” says Naushad Forbes. “Already, the demand for most consumer companies has fallen by 20% to 30%, at a time when companies expect an increase because of seasonal demand and the wedding season. The fall in consumer demand has a multiplier effect on investments, since companies see uncertainty ahead.”

R Chandrashekhar, the head of IT industry body Nasscom, sounded despondent on phone. But he hopes the businessman in Trump will prevail. “The promise he is making to the American people is to create more jobs. The government does not create jobs, businesses do. And for that IT services are inevitable.”

He said it is not that Indians are taking away jobs from Americans with similar or better qualifications and skills by demanding lower wages. “By 2018,” said Chandrashekhar, “More than 1 million IT jobs will remain vacant in the US because there is no candidate to fill them.”

Harshvardhan Neotia, president of industry body Ficci, is also putting his faith in Trump. “At times he has said things and retracted. So we don’t know how it will impact India,” he said.

Soumya Kanti Ghosh, chief economic advisor at the State Bank of India, sees a slowdown of the economy in the October-December quarter of up to a percentage point. “If the restriction on bank withdrawals is removed, then there will be a rebound in the fourth quarter,” he said.