Federal Reserve move to have minimal impact on India: CEA Arvind Subramanian

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New Delhi | Updated: December 18, 2015 12:51:14 AM

With the US Federal Reserve raising interest rates for the first time in almost a decade, senior government officials on Thursday said the move will have minimal impact on India and won't lead to any large-scale capital outflows.

With the US Federal Reserve raising interest rates for the first time in almost a decade, senior government officials on Thursday said the move will have minimal impact on India and won’t lead to any large-scale capital outflows.

“As far as India is concerned, we are really well cushioned. Inflation is coming down, fiscal deficit situation is very good, external situation is also robust. So, I think for all these reasons impact on India would be very minimal,” chief economic adviser Arvind Subramanian said.

The Fed raised interest rates by 25 basis point late Wednesday night with chair Janet Yellen saying would be followed by “gradual” tightening as officials watch for evidence of higher inflation.

“What is very good is that the Fed chief has talked about the sustained nature of US revival, which I think is a good news for countries like India, which export a lot of IT and services to US,” economic affairs secretary Shaktikanta Das said. He also ruled out capital outflows from India under the current circumstances.

While the move was widely expected, there were concerns that the Fed rate hike could result in foreign funds outflow from emerging markets like India.

Indian markets shrugged off any negative impact and the benchmark BSE Sensex index gained over 309 points in Thursday’s trade, which analysts attributed to the markets having already factored in the Fed rate hike.

A spectacular rally by the rupee further supported the sentiment. The rupee climbed to a two-week high of 66.51 against the US dollar following heavy dollar unwinding after the Fed’s decision.

Some analysts say the rate hike was more symbolic and was aimed at displaying the belief that the US economy has largely overcome the wounds of the 2007-2009 financial crisis.

“It is very difficult to be sure that this is going to be the beginning of a rate cycle, because it is clear from the Fed statement that they are going to be very cautious going forward,” Subramanian said.

India not immune to rate hike jitters: Fitch

India is not immune to potential market jitters on account of interest rate hike by the US Fed, but favourable economic growth outlook makes it attractive for foreign investors, Fitch Ratings on Thursday said.

The country’s lower dependence on exports and improved external balances make it better placed than many of its peers, it said.

Thomas Rookmaaker, director, Sovereign Ratings, Fitch Ratings, said, “The Reserve Bank’s focus during the upcoming monetary policy reviews will increasingly shift to domestic parameters, critical being the growth-inflation rhetoric.”

‘India better placed on capital volatility’

The uncertainty over transition of the US monetary policy to normalcy could set off volatility in capital flows to emerging economies, but India is better-positioned to weather these challenges, Moody’s Investors Service said on Thursday.

Moody’s Investors Service VP and senior research Analyst Rahul Ghosh said that besides the Fed rate action, a slowdown in the Chinese economy and falling commodity prices are other major global developments that could impact emerging markets.

With inputs from PTI

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