 "US Fed rate hike may add to demonetisation pain")
A 25 basis point rise in interest rate by the US Federal Reserve might accentuate economic challenges for India in the coming quarters, in addition to the persistent uncertainty on account of demonetisation of high-denomination currency notes, feel economists.
However, the finance ministry believes the impact on India would be smaller than that on other emerging market economies, as India is seen as a "bright spot."
An expected withdrawal of foreign institutional investors from the market is likely to weaken the rupee against the dollar over the next few quarters. This is likely to have some impact on consumer price inflation, on account of more expensive imports, say some.
The Fed is expected to raise rates twice or thrice more in 2017.
"The Fed rate hike and rupee depreciation have added to the uncertainty for the Indian economic growth outlook for the next couple of quarters, posed by the impact of demonetisation on consumption. Besides, with two-three (Fed) rate hikes expected in 2017, the dollar is expected to strengthen further," said Aditi Nayar, principal economist at rating agency ICRA.
ICRA will review its earlier forecast for the March quarter after the amount of new currency released into the system by December 31 becomes clear, "as this would indicate how quickly economic activity normalises".
The economy is expected to see a dip in the third (December) and fourth (March) quarters on account of muted consumption activity due to the cash crunch. In the financial year's first half, gross domestic product had expanded by 7.2%.
The rupee closed on Thursday at 67.84 a dollar, 0.6% lower than Wednesday and the sharpest fall since November 11. During the day, it touched a low of 67.89 a dollar.
The Sensex closed at 26,519.07 points, down 0.3% from its previous close.
Arvind Subramanian, the government's chief economic adviser, said the economy was well cushioned to absorb the Fed move. "This was anticipated and expected after the US elections as there was already a big fund outflow from the emerging markets. (As) India is in a bright spot, the impact on us would be much smaller," he said.
He added the Reserve Bank's policy review (last week, it maintained the repo rate at 6.25%) also took account of this in a sensible way. "There might be some short-term things. This is not something we need to worry about."
The other challenge, he said, was to keep an eye on the currency situation in Southeast Asia and in China
Shubhada Rao, chief economist, YES Bank, said: "We maintain our projections for the rupee value against the dollar in the 68-70 range for the next 12 months, with sharp depreciation pressures unlikely, amid strong domestic fundamentals."
Nayar of ICRA said depreciation of the rupee, relative to the dollar, posed a milder risk to Consumer Price Index (CPI) inflation than to that in the Wholesale Price Index (WPI). "We continue to expect CPI inflation to modestly undershoot RBI's Q4 target of 5%, permitting a further 25 bps cut in the repo rate." CPI inflation eased to a record low of 3.63% in November.
"We believe the impact on India will be muted, though the currency can take a short-term hit. Interestingly, there could be a commonality as far as fiscal stimulus is concerned between the US and India," said Soumya Kanti Ghosh, chief economic adviser, State Bank of India.
The CEA also said:
On GST: Lower and simple taxes are always preferable but there is a strong case for inclusion of real estate and electricity into the GST value chain
Demonetisation: A challenges for the economy in the short term is to manage the demonetisation fallout. However, this would be a short-term phenomenon;
Oil prices: When these go up, nimble producers will also increase production. Don't think oil prices will rise to a level that the Indian economy can't handle.
