NEW DELHI: India should worry about the hike in interest rates announced by the U.S. Federal Reserve, say experts, since it can attract funds to the US from developing countries like India. The Fed on Wednesday, had raised interest rate from 0.5 per cent to 0.75 per cent.
According to analysts, this will have an impact on the Rupee and slow down Indian equity markets, becoming a genuine reason for the Reserve Bank of India (RBI) to not cut interest rates and retain India’s attractiveness as a sought after debt market for foreign funds.
This has been a concern among economists in India and officials in RBI and the Finance Ministry, especially since the industry and stock market watchers have suggested that the Rupee could breach the 70 dollar mark before March, 2017.
“On the impact on India, we believe it will be muted though the currency can take a short term hit.
Interestingly, there could be a commonality as far as fiscal stimulus is concerned between U.S. and India,” says Soumya Kanti Ghosh, Group Chief Economic Advisor, Economic Research Department, State Bank of India.
Corporates are also worried that a weaker rupee could make imported goods like crude oil costlier. For software companies, a weaker rupee means higher margins, but will have a side effect, as in the past, of reduced orders. But software companies are unlikely to be impacted, feel IT firms.
“It is going to be a status-quo for software companies in India, since this was expected. American companies are reasonably flush with funds, so for the IT sector, nothing will change,” C P Gurnani, Chairman Nasscom told Express. But the concerns persists for importers of metals, such as copper, aluminium and machinery can turn expensive, potentially squeezing margins.
“There is a possibility of a rise in prices of goods, which means cars and even TVs can become costlier,” said Amirulla Khan, visiting Professor at Amity University.
The rupee’s slide can also hurt companies with overseas loans as repaying in dollars will get costlier. “Our economy will remain stable since the Indian market had factored in the 25 basis cut by Fed,” pointed out Shaktikanta Das, Secretary, Department of Economic Affairs.
But even a 25 basis point cut is being seen with concern by some, since India is already going through a liquidity crisis arising from the demonetisation of Rs 1,000 and Rs 500 notes.