US Fed rate hike may impact Indian economy

Wednesday 22nd March 2017 06:02 EDT
 
 

The US Fed has raised interest rates by 25 basis points, taking overnight funds rate to a target range of 0.75 per cent to 1 per cent. It is the second time in three months, that the company raised the interest rate, setting a likely path of regular hikes. Such increases generally impact emerging economies like India, very negatively.

India's external debt stood at $485.6 billion in 2015/16, recording an increase of $10.6 billion over its level in 2014/15. The US-dollar-denominated debt continued to be the largest component of India's external debt with a share of 57.1 per cent, followed by Indian rupee (28.9 per cent), SDR (5.8 per cent), Japanese Yen (4.4 per cent), and Euro (2.5 per cent). The value of external debt could increase with further firmness in the dollar.

Also, hikes in Fed rates may push Indian companies to pay a higher outgo while repaying their loans. A higher cost of borrowing on future dollar loan will also impact a company's balance sheet. Foreign institutional investors have already been pulling money from the equity market. But of late, they have been buying. The correction in the market started long before due to speculation. Gold prices are highly sensitive to rising US interest rates. Once the rates start moving higher, they can push gold prices further down.


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