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Fed rate hike can spark capital flight, warns Parekh
US Fed chair Janet Yellen had on Saturday made a stronger case for a rate hike this year
HDFC chairman Deepak Parekh on Monday cautioned that India may see a massive outflow of capital if the US Federal Reserve hikes interest rates, as indicated by its chief Janet Yellen over the weekend.
“In January and February, India saw an outflow of about $3-4 billion and the rupee came under pressure...Any hint of raising interest rates in the US will result in massive capital outflows, once again resulting in unprecedented swings in currencies and stocks,” Parekh said, addressing a CII event on risks.
Last week, equity funds had pumped in $5 billion in emerging markets, while over $20 billion was invested in emerging market bonds.
If such capital exits India, it can lead to depreciation of the rupee that may lead to increased prices for food and other products.
US Fed chair Janet Yellen had on Saturday made a stronger case for a rate hike this year at a meeting at Jackson Hole, Wyoming, over the weekend.
The HDFC chairman said India needs to focus on attracting long-term foreign direct investment. “On the one hand, there is tepid growth, continued problems with European banks, massive over capacities in China... but on the other hand, key global stock markets have touched or are nearing all-time highs,” Parekh said.
Parekh said India is however on an extremely strong wicket with a strong leadership (referring to Prime Minister Narendra Modi) at the helm.
“India has never been in a stronger macro position than today,” he said, adding that the bidding for major projects has become transparent although private sector capex continued to be slow.
With the present government large-scale corruption has been weeded out, he felt. With a projected GDP of above 7.5%, India stands out in comparison to its global peers, he added.
Read: As Fed nears rate hikes, policymakers plan for ‘brave new world’