In a widely anticipated move, the US Fed hiked interest rates by 25 basis points, taking the overnight funds rate to a target range of 0.75 per cent to 1 per cent. It raised the interest rate for the second time in three months, setting a likely path of regular hikes.
Such hikes generally have a negative impact on emerging economies like India. However, some of it is already priced in markets. Let us explore what it means for the Indian economy.
External debt: 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). With further firmness in dollar, the value of external debt will increase.
Indian companies: Indian companies have increasingly resorted to foreign borrowings to meet their financing needs, thanks to near-zero interest rates. With hikes in Fed rates, companies may have to bear the brunt of a higher outgo while repaying their loans, in case dollar appreciates further. A higher cost of borrowing on future dollar loan will also impact a company's balance sheet.
Stock markets: 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: Gold prices are highly sensitive to rising U.S. interest rates. Once the rates start moving higher, they can push gold prices further down.
Indian currency: Rupee may come under pressure and may depreciate further due to increase in interest rates.
Imports: It may inflate our import bill.
Inflation: It may put pressure on inflation, which inched up 3.65 per cent in February from 3.17 per cent in January.