How US Fed rate hike could impact the Indian economy

As there are signals from the US Federal Reserve on a rate hike, Asian stocks are feeling the jitters. Even Indian markets cracked in opening trade on Monday.

Boston Fed president Eric Rosengren has claimed the US economy is resilient to rate hikes else it could even overheat.

Why is the Fed rate hike important?

After the banking crisis in 2007-08, the Fed, which is the US central bank, decided to lower rates to prevent a total economic collapse. Hence, the rates were pulled down to reduce borrowing costs for businesses. The last major shift in stance was seen in December last year, when it held the target range for the federal funds rate at 0.25 per cent to 0.5 per cent, lifting the rates by a quarter point from near-zero levels for the first time in nine years. 

Why should Indian markets care?

India will not be immune to the Fed rate hike when it happens as foreign investors will opt for the safer US bonds, triggering market volatility. Hence we see market volatility on just a signal from the Federal Reserve. Next, the rupee could come under pressure leading to a spiralling impact on our import bill. Not only that, with India importing 80 per cent of its oil needs, inflation could shoot up as well if our import bill goes higher.

What is the silver lining on D-Street?

The Reserve Bank of India (RBI) could come to the rescue, to stem extreme volatility on D-street. Currently, the RBI is sitting on comfortable forex reserves and can stabilise the Indian currency. It could also keep the door open to ease rates at home as well. A good monsoon combined with the Seventh Pay Commission bonanza will spur consumer spending and help boost the domestic industry.