Argentina, Turkey may feel heat of potential US rate hike, but India is ‘absolutely fine’: Morgan Stanley

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Published: June 7, 2018 5:13:04 PM

With the US Federal Reserve meet due next week Morgan Stanley says that a potential rate hike could impact emerging market like Argentina and Turkey, but India will be 'absolutely fine', given macro stability.

Countries like India should be absolutely fine because we have a much better starting point in macro stability indicators, Chetan Ahya of Morgan Stanley said.

With the US Federal Reserve meet due next week, and many economists and market voices expecting a rate hike to tackle rising inflation in the country, Chetan Ahya of Morgan Stanley noted that a potential fed rate hike could impact Argentina and Turkey, but India will be fine, given macro stability. According to the expert, EMs such as Argentina and Turkey are in a bad shape and have a macro stability problem.

“But countries like India should be absolutely fine because we have a much better starting point in macro stability indicators,” Chetan Ahya, MD, Morgan Stanley told in an interview to ET Now. A rate hike may be in the offing as the US central bank looks to combat inflation. Next Wednesday the US central bank will likely raise key overnight borrowing costs to roughly match its target for inflation, meaning that for the first time in almost a decade the cost of borrowing dollars will no longer be essentially free, Reuters reported.

According to Chetan Ahya, the EMs were safe during the previous time when the US Fed was constantly hiking interest rates between 2003-07, as those hikes were counter-cyclical as opposed to pro-cyclical. “There is a case for differentiation in EMs this time. Unlike in 2003, it is not good for all EMs. Some EMs like Argentina, Turkey are in a bad shape and have a macro stability problem. But countries like India should be absolutely fine because we have a much better starting point in macro stability indicators,” Chetan Ahya told the channel.

How many more rate hikes are we likely to see going forward by the US Fed Reserve? “Markets are already moving towards pricing in three more rate hikes. At this point, we are building in two more rate hikes because we think that the Fed will probably need to take a bit of a pause. Our rate hikes are by the way in June and September. We are saying that the Fed will skip the December quarter hike because they need to watch that real interest rates reach closer to neutral,” the expert noted. 

Yesterday, India’s central bank RBI joined the bandwagon of central banks hiking interest rates in order to counter Fed’s policy. In its policy review yesterday, the Monetary Policy Committee (MPC) hiked the repo rate to 6.25%.

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