Fed hikes rate by 75 bps: Five ways the move could affect India
The recent hike by the Federal Reserve will have both positive and negative impact on the Indian economy, said economists
July 28, 2022 / 07:21 PM IST
Federal Reserve Chairman Jerome Powell (File image)
The US Federal Reserve on Wednesday hiked its policy rate by 75 basis points (bps), and is expected to raise rates by another 200 bps during the remaining months of 2022.
Here are the five impacts of Fed rate hike on the Indian economy:
- Aggressive monetary policy by the RBI: India's June inflation print hints that the Reserve Bank of India (RBI) will remain aggressive over the next few meetings in terms of policy rate action, according to economists. “With the shock 9.1 percent inflation reading in the US suggesting no let-up in Fed aggression (some dovish pivot notwithstanding), we are braced for strong RBI action. We expect another 50 bps rate hike at the August meeting, taking the policy rate to 5.4 percent, above the pre-pandemic peak of 5.15 percent but with far higher inflation now than then,” said Kunal Kundu, India economist, Societe Generale.
- The rupee could see some gains: One possible positive outcome of the Fed rate hike is that the Indian economy could benefit from an appreciation in the rupee. Many economists pointed out that this might be the last stage of tightening and soon the Fed may start to slow the pace of rate hikes. “In the near term, the rupee could record some gains on the back of a softer dollar. That said, it could be too soon to perceive that the Fed might be slowing the pace of rate hikes as its actions would depend on the incoming US inflation prints,” said Swati Arora, senior economist, HDFC Bank.
- More outflow of foreign portfolio investment: Another fallout according to economists could be a higher outflow of foreign portfolio investment (FPI) as the preference shifts to developed economies like the US rather than a developing economy like India. “There are chances of a pickup in FPI outflows after last week’s positive inflows. Despite 40-year inflation of 9.1 percent, FOMC (the Federal Open Market Committee) stuck to its 75 bps hike, thereby acknowledging the risks to growth amid the fear of a steeper slowdown,” said Sarbartha Mukherjee, economist, Mahindra Group. With forex reserves going down, there will be further pressure on the rupee.
- Rise in cost of imports: Higher rates in the US are likely to be negative for emerging economies particularly India from a capital flows perspective, said economists. The financial conditions are likely to get tighter. “More than half of India’s CPI (Consumer Price Index) basket constitutes tradeable items. A weak INR (rupee) adds to pressure on inflation as landed cost of imports rise. Should the INR depreciate further, the impact of recent softening of commodity prices on inflation could be milder,” said Shashank Mendiratta, an independent economist from Delhi.
- Positive impact for Indian corporates: In a non-hike-related development, economists predict that the US is likely to remain India's largest trading partner, as India has by now managed to show signs of stabilisation. Indian corporates are better placed as seen by the strong results of the previous quarter that have started coming in.