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US Fed Lift off to be Minimal

The US Federal Reserve on Wednesday raised the key rates by a quarter point, ending a 7-year-long period of easy money.

Published: 18th December 2015 05:06 AM  |   Last Updated: 18th December 2015 05:06 AM   |  A+A-

Janet

NEW DELHI/CHENNAI:The US Federal Reserve’s move to raise policy rates by 25 bps for the first time since 2006, is unlikely to be a drag on India, whose fundamentals seem stronger than its other Asian peers.

The world’s largest economy is considered to be an economic bellwether for other nations. As the US economy grows, it results in an uptick in the exports of countries like India and China. But a sustained US growth will also raise commodity prices, oil in particular, as the demand for goods picks up. This would have an impact on the inflation that a heavy oil importer country like India has to deal with. Oil imports constitute one-third of India’s total imports.

Lightening.JPGThe widely-anticipated rate hike is expected to bolster the value of the US dollar, a currency used globally to buy and sell raw materials including oil. Strengthening of dollar augurs well for those investing, but for companies borrowing capital, it will mean higher interest outgo.

As on September 2014, Indian companies borrowed about $161 billion from foreign shores. Commercial foreign borrowings have grown at an annual rate of 15.6 per cent since the 2008 global financial crisis, outpacing India’s growth in dollar terms.

According to a note by the Ministry of Finance, India’s debt service payments were manageable as indicated by the debt service ratio of 5.9 per cent during FY14. Debt service on External Commercial Borrowings, with a share of 72.4%, dominated India’s debt service payments, followed by NRI deposits, external assistance and rupee debt. The dominance of ECBs indicates growing recourse on ECBs to meet financing requirements.



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