Fed rate hike likely to cause volatility in emerging markets: Rajan

  • Yashwant Raj, Hindustan Times, Washington
  • Updated: Oct 13, 2014 02:16 IST

RBI governor Raghuram Rajan has said that emerging markets may experience some volatility initially when the US Federal Reserve begins to raise interest rates.

“My hope is that after the initial volatility there will be differentiation, and financial investors would try to see where there is some macro-stability... and I hope India comes out in (that) group,” Rajan said on the sidelines of of the International Monetary Fund and World Bank fall meetings.

Overall, however, when the US begins to raise rates, it will be good for the rest of the world. “The rest of the world will benefit from US growth,” he said.

There are no timelines yet on when the Fed will begin raising rates. It said in September it would end its bond-buying scheme in October but will leave the interest where it is now, near zero, for “considerable time”.

The bond-buying scheme has been the Fed’s chief weapon against the economic crisis that began in 2008.

But because the economy was nearly not as robust as the Fed would have liked it to be, a decision on interest rate rise was left to be determined at a later date.

The rupee plunged when the Fed first indicated it would end quantitative easing in 2013.

This time around, however, Rajan said a Fed rate hike would raise a question for India — “do we go closer to the dollar, do we go close to the euro?”

“There will be some adjustments that would need to be made on that basis,” he added.

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