Not a bang, but a ripple: India will be unaffected by US Fed hike

  • Hindustan Times
  • Updated: Dec 18, 2015 00:14 IST
The US Federal Reserve hike will affect most emerging economies, but India should remain unscathed. (REUTERS Photo)

The US central bank fulfilled expectations by reversing, in the gentlest possible manner, an easy money policy that began seven years ago. The initial stock-market rally in most of Asia and the West indicated that the decision of Janet Yellen, chairman of the US Federal Reserve, to stay both predictable and incremental in her policy actions went down well.

The real test will come in the next few months as a rising dollar exacerbates an already dramatic slump in commodity prices and the costs to companies and governments with high levels of dollar-denominated debt become clearer. But with markets having already factored in the interest rate hike over the past few months, and given the hike was a quarter of a basis point no major rupture should be expected.

Over the next year, the US central bank is expected to raise interest rates further if domestic inflationary pressure continues. Emerging economies will suffer some common but differential pain as a consequence. Rising debt costs and falling commodity prices will mean a number of emerging economies, notably in Latin America and Africa, and some like Russia, will see their economic problems worsen. India should be among those who will be largely unscathed and, possibly, even benefit.

As a net commodity exporter with limited dollar debt exposure, healthy foreign exchange reserves and a stable polity, India should suffer at worst a slight drop in the rupee’s dollar value. Even this may be temporary as money flowing out of badly-affected economies may be redirected to India.

The world economy will now be marked by a striking lack of global monetary policy coordination. The European Central Bank, the Bank of Japan and now the People’s Bank of China remain on the path of monetary easing — reflecting the less rosy economic growth figures they have at home.

As the interest rate differential between them and the Federal Reserve increases, international currency volatility is likely to spike. This will make life more difficult for Indian exporters, already suffering from weak global demand and New Delhi’s poorly thought out trade policies. But the larger issue will be the steady withdrawal of much of the $ 3.8 trillion that the US central bank pumped into the system to tide over the global financial crisis.

Yellen has raised the ceiling on reverse-repurchase agreements by $ 1.7 trillion. India, again, is relatively isolated from all this. But the rest of the world is far less prepared for what will unfold. Fortunately, it is likely to do so in such slow motion that its negative impact will be more akin to a ripple than a shock.

Read More:

Fed hikes rate: What India should watch out for

How the US Fed rate hike will impact Indian markets

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