 "Federal Reserve Chair Janet Yellen (Photo: AP/PTI)")
The US Federal Reserve's announcement of an interest rate hike is expected to slightly improve export earnings but a stronger dollar may push up import costs.
With economic growth picking up since the middle of the year, the US Federal Reserve on Wednesday raised interest rates -- only the second time in a decade. The last hike had come a year ago in December 2015.
Export earnings are set to go up slightly as the US dollar strengthens on the back of the Fed announcement leading to a weaker Rupee. However, global demand conditions still remaining significantly low, only traditional sectors with low competition such as handicrafts, carpets, and certain textiles categories are expected to see a discernible rise.
This benefit is not expected to be significant with the goods being low exchange earners, to begin with. Carpets worth only $1.72 billion were exported in 2015-16.
On the other hand, new manufacturing sectors such as electronics are set to see a surge in exports, Sachin Chaturvedi, Director General of trade policy think tank RIS said.
On the other hand, with US government bonds providing a better return on investment, experts predict that incoming investments may slow down. US Dollar outflows could weaken the Rupee, thereby holding back the RBI from cutting interest rates, which could lead to further outflows.
"But the exodus of capital which was feared, might not happen in India owing to renewed interest in the country's manufacturing sector. The same capital flight may affect other competing nations, giving India a benefit." Chaturvedi added.
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"Dollar outflows could weaken the rupee as the increase in crude prices has already led to increase in dollar demand." Federation of Indian Export Organizations President SC Ralhan said.
This may have acted as a further boost to exports had similar steep depreciations in the currency of competitor nations not happened, Ralhan added.
Exports dipped significantly in November owing to demonetisation, only managing a 2.29% rise after rising by 9.6% in October.
On the import side, costs are set to rise as a weaker Rupee will inflate the import bill. This becomes significant with the Organisation of Petroleum Exporting Countries (Opec) - a group of 14 major oil exporters including Saudi Arabia, Iran, Iraq and accounting for one-third of global oil output - announced earlier in December that they would significantly cut their production levels for the first time in two years since prices crashed. Crude prices have risen as a result.
The cost of imported raw materials like Aluminium, Copper and sophisticated machine products may also turn expensive. This will lead to prices of commodities like cars and televisions getting expensive.
