India will have to "balance out" its interest rate with that prevailing in the US to control the flight of capital so that there is no volatility in the rupee-dollar exchange rate, said a top official at the ministry.
Observing that Fed rate hike has ended the uncertainty surrounding the major global event, Economic Affairs Secretary Shaktikanta Das said the Indian markets have already factored in the impact of the increase.
Chief economic Advisor Arvind Subramanian said: "Indian economy is very well cushioned to absorb the impact. Of course, there will be some reassessment and money will flow from emerging market to the US at least for some time. But in that, we will be less affected than other countries."
Another Finance Ministry official said that since US is considered as a safe haven for deposits, any interest rate hike will make depositing money there attractive and hence investors might readjust their portfolios.
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The official said: "0.25 per cent Fed rate hike will be absorbed as this has been factored in. But all other emerging market economies will come under pressure. The more we lower our interest rates, the risk of flight of capital will be higher.
The rupee tumbled by 42 paise to 67.85 against the US dollar in the morning trade as American currency strengthened globally. It closed the day 40 paise down at Rs 67.83.
With foreign exchange reserves of USD 360 billion and domestic consumption led demand, India is considered to be better prepared than other developing markets to weather the Fed rate hike impact.
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Last week, Reserve Bank of India maintained a status quo on interest rates, saying it wants to wait and see how the impact of demonetisation and the US Fed rate hike play out.
Asked about spike in oil prices after OPEC and non-OPEC members agreed to cut production for the first time since 2008, he said that the oil market has evolved in the last 5-7 years and there is a natural kind of ceiling on how high the price can go because of shale oil and shale gas.
"If the prices go up and down, there will be some implication, but I don't think the oil prices are going to surge to a level which is difficult for Indian economy to handle," the chief economic advisor said.
Outlining the challenges faced by the economy in the global arena, Subramanian said India will have to watch out how the currencies of East Asian countries, including China, pans out as well as whether there is a global demand to absorb the manufactured products that India exports.
Referring to the domestic challenged facing the economy, Subramanian said it would be how the government and RBI manages demonetisation over the next weeks and months until the economy is remonetised again. Also the twin balance sheet problem of corporates and banks remain a cause of worry.