US Federal Reserve hikes rates 25 bps: Impact on Indian markets minimal, says CEA Arvind Subramanian

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Published: December 17, 2015 11:15:03 AM

The Chief Economic Adviser (CEA) Arvind Subramanian on Thursday said the impact on India on the interest rates hike by US Federal Reserve will be minimal.

The Chief Economic Adviser (CEA) Arvind Subramanian on Thursday said the impact on India on the interest rates hike by US Federal Reserve will be minimal.

“This rate hike was widely anticipated so, I don’t think it would have much impact of this per se. I think the impact will depend upon what it signals about the future rate hike. As far as India is concerned we are really well cushioned on the macro economic side, inflation is coming down, fiscal deficit situation is very good, so for all these reasons, I think the impact on India will be minimal,” Subramanian told the media here.

“We will do the press briefing tomorrow on our fiscal and monetary measures to arrest the volatility of the market,” he added.

The US Federal Reserve has raised interest rates by 0.25 percent, its first increase in nine years.

This was announced on Wednesday after a two-day policy meeting between officials with stocks rallying in early trading in Europe and the US.

The rate, which stands at 0.5 percent after the increase, was kept the same through out the global credit crunch so that financial institutions could borrow cheaply and in turn allow them to lend at lower rates.

The US central bank cited as the reasons for its action increased household spending and investment by business, along with a continued low rate of inflation. The bank also raised its projection for its economic growth next year slightly, from 2.3 percent to 2.4 percent. That suggests the bank does not think the rate increase will damage growth. US share markets jumped in response.

The move is likely to cause ripples around the world. It could also mean higher borrowing costs for developing economies, many of which are already seeing slow growth.

Much of what happens in India will depend on how foreign institutional investors (FIIs) react to the Fed hike. FIIs have withdrawn nearly $2.5 billion from domestic markets since November in anticipation of a hike.

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