Fed rate hike

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Bikky Khosla | 20 Dec, 2016
It was a question of when, not if, and the US central bank finally pulled the trigger last week, announcing its long-awaited interest rate hike. It went for a 25 basis points raise in federal funds rate, which was clearly on expected lines, but what had not been anticipated was its future rate hike forecast. The Fed said â reaffirming its confidence in the US economic recovery â that it would be looking at three rate hikes next year rather than the earlier predicted two. The decision has sent ripples worldwide, and economy watchers across the world are now worried about how the Fed policy could play out in the coming days.

Should India worry? While the effect from the Fed decision is still being felt, with a sense of nervousness gripping the stock markets and the rupee falling against the dollar, majority of experts believe that the hike would not have a significant impact on India. Concerns, particularly short-term, are of course there, such as volatility in the stock and currency markets, capital outflow and rise in costs of capital for Indian companies due to higher interest rates in the US, but it is expected that our strong economic fundamentals and robust growth will help weather the impact.

But it's better safe than sorry. The Centre must remain cautious about the rupee further weakening. Measures are required to counter outflow of capital, which amounted to nearly Rs 20,000 crore in November and has continued with no less pace in December. Also, crude prices, which have doubled over the year and may rise further due to OPEC's recent decision to cut production, could affect our trade deficit. In addition, the falling rupee may lead to higher inflation, giving the RBI a reason to not cut interest rates. So, a balanced approach is need to be taken at this juncture instead of being complacent.

I think it is also the right time to lend the export sector a helping hand. Official data shows that our merchandise exports continued to grow in November. This is the third consecutive month of growth and it is encouraging that 20 out of the 30 sectors performed positive in the month. But again, we should not take our eyes off of the fact that global demand is still not strongly picking up. In addition, the Fed hike may result in a sharper erosion in currencies of our competing economies, impacting our exports and creating further external account pressure. So, caution is still necessary.

I invite your opinions.