FinMin sees little Fed hike impact on Indian markets

The country's top economic policy makers said on Thursday that the first rate hike by the US Federal Reserve in nearly a decade will have minimal impact on Indian markets and should not lead to any large-scale outflow of foreign funds.

The Federal Reserve on Wednesday night decided to hike the rate by 25 basis points (bps) after keeping them at near-zero levels for a prolonged period - its first hike since 2006. While the move was widely expected, there were concerns that Fed hiking interest rate could result in increased outflow of foreign funds from emerging markets like India.
 

However, Indian markets shrugged off any negative impact and the benchmark BSE Sensex index closed over 309 points up at 25,803.78 - its biggest single-day gain in about a month - having factored in the hike.

"This marks the beginning of gradual withdrawal of the accommodative monetary policy stand adopted since 2006. Going forward, the actions of the US Federal Reserve are expected to be cautious and data driven," the finance ministry said in a statement.

"India is much better placed today in terms of real GDP growth, lower inflation, lower current account deficit and ongoing fiscal consolidation. We hope to sustain economic reforms going forward into the future," it said.

The Fed move is widely seen as bolstering the value of the US dollar, a currency used by India and other nations to buy and sell most raw material, including oil. "We have to consider how the Fed is going to raise its rates going forward... We are very well-equipped to deal with any turmoil or volatility that may ensue as the Fed raises rates," Minister of State for Finance Jayant Sinha said.

Sinha further said the Finance Ministry is monitoring the currency markets on a "consistent basis because those tend to move most rapidly and in the most volatile manner when it comes to interest rate changes".

The rate hike signals the Fed's belief in the US economy having largely overcome the wounds of the 2007-2009 financial crisis. Chief Economic Advisor Arvind Subramanian said India is "relatively well-cushioned" and saw "quite minimal" volatility in the country's markets.

Maintaining its strong edge and upbeat momentum, the Indian rupee climbed to a two-week high of 66.51 against the US currency in mid-day trade following heavy dollar unwinding after the Fed's decision.

Economic Affairs Secretary Shaktikanta Das said the Fed's "accommodative" monetary stance is actually good for the emerging market economies and India does not expect any large selling by foreign funds. "We are well-prepared to deal with such external developments," Das told reporters. India is benefiting from low crude prices and overall macroeconomic stability is also there, he added.

Earlier in a tweet, he said the end of "uncertainty and accommodative outlook (of Fed) for future will help policy-makers in emerging economies."

"US Fed rate hike and reference to gradualism are on expected lines. India well prepared," he tweeted, while adding that the Fed's confidence on recovery is good news for India's exports, especially for the IT sector.

Subramanian said the rate hike was widely anticipated and the "markets should have priced this in and there shouldn't be much of an impact of this per se (on markets)."