US Feds first rate hike in 9 years after crisis may benefit India – In a widely anticipated move, Federal Reserve Chair Janet Yellen raised US interest rates on Wednesday.
On Wednesday, during a press conference after the Fed decision was announced Yellen promised markets that the Fed will move in “prudent” and “gradual” steps. The prospect of gradual rises could bring some stability to developing markets. If the Fed were to hike rates more quickly, investors may be frightened.
Global fund managers are presently nimble on emerging market stocks and are likely to dive in now to “fill out the holes” in their portfolios. With all the insecurity surrounding Fed policy, investors had taken out a net $500 billion from emerging markets in 2015, the first annual outflow in decades.
Investors anticipating the Fed’s rate decision have clustered back to the dollar, and the rupee has weakened. This week, it crossed 67 rupees to the dollar, a 2013 trading level. Analysts hope the RBI will intervene to support the rupee. This is also likely to pressurize the current account deficit.
On the other side, the strengthening of the dollar could have a positive effect on India’s export of goods and services. India’s goods exports dropped on year for the ninth consecutive month in August. Its services exports, as a share of the total economy, also have weakened.
New Delhi is hoping to increase India’s share of world trade to 3.5 percent by 2020 from 2 percent presently. Meeting its target of $900 billion in yearly exports by 2020 would necessitate India to sell twice as much to the rest of the world as it does today.