India is "very well cushioned" to absorb the impact of the US Federal rate hike and the currency market will stabilise after witnessing the initial ripples, the Finance Ministry said today.
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.
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"Projection for growth outlook remains fairly stable and only marginally improved. Markets had factored in the rate hike and we expect that our markets, the currency market, to stabilise after initial ripples or volatility. Whatever has happened today is not unusual and our markets will remain fairly stable," Das said.
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.
"India sees lower interest rate amongst other emerging market economies but we have to balance it out so that it does not impact the rupee," the official added.
With economic growth picking up since the middle of the year, the US Federal Reserve raised interest rate yesterday -- the second time in a year. It had last hiked rates in December 2015.
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 more is the gap between US and India's interest rate, rupee will be hit. So we have to do a balancing act on interest rate."
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.
Subramanian said India with strong macro economic fundamentals is "less anxious" than other markets following the Fed rate hike and RBI policy has taken that into account. "I think there will be some short-term things, but we need not worry on that".
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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.
The benchmark BSE Sensex fell 141 points in opening trade today, but later recovered some of the losses to close 83 points lower.
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.
Oil prices rose to a 17-month high after a deal between OPEC and non-OPEC members to cut output, but tumbled after the Federal Reserve raised interest rates for the first time this year. While West Texas Intermediate oil dropped USD 1.94 to USD 51.04 a barrel on the New York Mercantile Exchange, Brent fell USD 1.82, or 3.3 percent, to USD 53.90 a barrel.
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.
"If we post export growth of 15-20 per cent can the advanced economies be able to buy all these. And that is an important question -- will there be more protectionism, will advanced economies close their market or keep them open. That we need to watch very carefully," he said.
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.
