India is better placed than many of its peers to deal with the impact of the US Fed rate hike, according to Thomas Rookmaaker, Director, Sovereign Ratings, Fitch Ratings.
He observed that though India is not immune to potential general emerging market jitters related to the Fed lift-off, it is better placed than many of its peers for a number of reasons.
“First, its external balances have significantly improved since mid-2013, with foreign exchange reserves rising by some $65 billion to $353 billion as of November 2015 and the current account deficit narrowing.
“Second, India is less dependent than several of its peers on commodity exports, and has thus not been negatively affected by the global rout in commodity prices,” said Rookmaker.
Third, only a small part of India’s sovereign debt is held by foreigners or is denominated in foreign currency.
Fourth, India’s favourable economic growth outlook makes it relatively attractive for foreign investors.
At the end of its two-day rate setting committee’s meeting, the US Federal Reserve has raised interest rates (the interest rate at which banks offer to lend to each other overnight) by 0.25 percentage points to between 0.25 per cent to 0.50 per cent. This is the first increase by the Fed since 2006.
Bansi Madhvani, Analyst, India Ratings & Research (a Fitch Group company), said the US Federal Reserve’s decision to formally mark the end of its Unconventional Monetary Policy is a welcome sign of normalisation, which will augur well for domestic financial markets.
In a report, the analyst said, specifically, the rates and currency market will stand to gain in the near term; the 10-Year benchmark G-sec yield is likely to soften around the 7.70 per cent mark with bias towards further softening and the Indian rupee will stabilise between 66.3-66.6/USD during the week.
“With the Fed’s policy normalisation underway, the Reserve Bank of India’s focus during the upcoming monetary policy reviews will increasingly shift to domestic parameters — critical being the growth-inflation rhetoric.
“For financial markets with looming uncertainty over the Fed policy path behind, the driver for markets hereon will be more inward focused than external developments’ reliant,” the report said.