Simplified Laws Guide to Taxation and Legal Concern The US Federal Reserve on Wednesday hiked its benchmark interest rate by 0.25 basis points as widely expected. This is the first time in nearly a decade that the US central bank has raised rates. The Fed’s move was being closely watched globally because it impacts financial markets and commodities. US stock markets rallied after the Fed’s announcement.
The Federal Reserve kept rates near zero since December 2008 in a bid to kick-start the US economy. The sustained low interest rate regime led to inflow of liquidity across the globe.
Here’s how the Fed’s historic rate hike may impact India:
How will it impact Indian companies?
As global dollar liquidity will diminish, corporate’ with external commercial borrowings are likely to face pressures for repayment. Such companies may also face the wrath of the market.
How will bond markets fare?
The interest rate hike will make US bonds, even more attractive, as foreign investors will pull out of emerging markets toward safe haven US bonds. Though there is a considerable difference in interest rates between US and India, the RBI has been lowering interest rates of late and is likely to reduce further, and this has narrowed the difference.
What is the risk of rupee depreciation?
The rupee is already trading at Rs 67.13 to a dollar, and may depreciate further. Analysts expect the RBI to intervene to rescue the rupee. This is also likely to put pressure on the current account deficit.
What would be the impact on domestic inflation?
India imports about 80% of its crude oil requirement and a depreciating rupee would increase fuel prices, which may add marginal pressure on inflation.
How will interest rates move?
The Reserve Bank of India (RBI) going forward may become reluctant to reduce interest rates to counter inflation and stabilise the rupee
How will the stock market take in this change?
Much of what happens in India will depend on how foreign institutional investors (FIIs) react to the Fed hike. An increase in interest rates in the US may force global funds to withdraw from emerging markets including India, which may cause the stock market to decline.
Domestic stock markets and currency have been nervous in the run-up to the Fed’s announcement. They have already pulled out Rs 12,500 crore from equity markets since November 1. The foreign institutional investors will invest in US market since interest rate hike will be an indication that US economy is improving and stable, further FIIs will fear that Indian rupee depreciation will wipe out their profits.
However, 25 basis fed rate hike already factored in the Indian stock market. Indian market may not react sharply because the Indian economy has been on a recovery path and the GDP is growing in around 7.5% against the US dollar.
Source: economictimes.indiatimes.com
