So, it’s clear Donald Trump will be the next US President as the republican has comfortably beaten the democratic counterpart Hillary Clinton to take charge of White House in Jan, 2017. Trump got 279 electoral votes, 9 more than the mandatory 270 required to win the election. Whereas, Hillary won 228 votes. Donald, in its election campaign, has categorically stated the need to raise interest rates, which the US Federal Reserve, the central bank of the country, kept lowering when the outgoing President Barack Obama held the office. The Federal Reserve, however, raised the rates in Dec 2015, the first hike in almost a decade, and projected 4 hikes in 2016. But later, the projection got scaled down to 2. If the Federal Reserve decides to hike rates, which seems imminent, how it will then react the Indian economy in general. Are you aware of it? No, then this article is the perfect guide for you.
Impacts of Impending Move
1. The Fed rate hike, if comes into effect, will trigger market volatility as foreign institutional investors (FIIs) would take out the money from India’s capital market and invest it in safer US bonds. Those investors, who were planning to pump in dollars to India, may avoid doing so and instead invest in the US economy.
2. The rate hike will make the dollar dearer and rupee cheaper. Traders and exporters, who receive the payment in US dollar, are likely to gain largely from the move. The exports, which rose by 4.62% to $22 billion in Sep, could rise further post the hike. However, the export growth is subject to the overall demand situation prevailing in different regions, including Europe.
3. The weakening of rupee will raise the import bill of India quite substantially. With India importing nearly 80% of its oil requirements, the inflation could shoot up. The rate hike could lead to higher petrol and diesel prices.
4. If the inflation surges more due to the Federal hike, then it could force the RBI to rethink its monetary policy stance. The RBI, since the last couple of years, has been on a rate cut spree to allow commercial banks to disburse cheaper loans to the industry, thereby boosting the overall economy of the country. The US interest rate hike could stem the repo rate cut.
5. There could be a rally in the gold prices in the wake of US rate hike.