News Wrap: India Prepares for a Rate Hike

Following last year’s national election, investors and pro-business groups have lauded India’s economic reforms. From increased foreign direct investment to new dialogues between companies and the government, optimism in India’s economic future is high. However, concerns remain about the effect of a hike in interest rates from the U.S. Federal Reserve Bank (Fed) on the Indian economy. Based on a statement made by Janet Yellen on March 18, some analysts expect higher rates as early as June.

As reported by LiveMint, Reserve Bank of India (RBI) Chief Raghuram Rajan is confident that India is ready for a Fed-induced change in the money supply. “India is prepared to deal with the consequences of a US Federal Reserve move towards an increase in interest rates, including heightened market volatility.” Rajan added that “India’s foreign exchange reserves were “comfortable”, and the current account deficit was under control.

IMF Chief Christine Lagarde echoed Rajan’s sentiments during a recent visit to India, according to a report in the Economic Times, calling India a “bright spot” on the cloudy global horizon.

“One cannot ignore the risks of volatility in capital flows that could emerge as the US normalizes its monetary policy stance as advanced countries ramp up quantitative easing. However, India has prepared better than most emerging-market economies for any such external shocks, shrinking current account deficit and increasing stock of international reserves; the higher GDP growth expected now, should help, says Lagarde.”

Another article in the Economic Times adds that the real worry should be focused towards China, not the Fed’s decisions. 

“India should be worried more about China than US Federal Reserve Chair Janet Yellen's rate hike, say experts. According to them, India may not get directly impacted at the moment if Yellen does go ahead with a rate hike but what the country should worry about is its indirect impact through other routes such as China where the concerns are much greater and unpredictable.”

DNA points out that India has significant dollar-denominated debts, and should be more concerned about the growing strength of the dollar than possible rate hikes.

“A cause of worry is India's high external debt of roughly $460 billion which is securitized against forex reserves which are at an all time high ($337 billion).”

“This external debt is only going to go up as India and its industry looks to raise more money in dollar terms. This dollar debt has worked for India must be controlled as India's economic output is still not out of the woods. Stronger dollar is only going to make India's dollar debt balloon further and without proper hedging strategies in place, it is indeed a ticking time-bomb.”

Writing for Reuters, Aviral Gupta takes a more contrarian approach, claiming that the Rupee will outperform its peers in a rate-hike environment due to India’s economic reform agenda.

“As far as the rupee is concerned, as of last week, it was the only emerging markets currency which appreciated in the past year against the dollar, despite the dollar index hitting new highs every day in anticipation of a Fed rate hike. This can be attributed to the inherent strength of Indian economy, supported by steady reforms being brought in by the BJP government and strong FPI inflows.”

Though a change in the Fed’s monetary policy will certainly impact India, most observers seem to agree that the country is well prepared for a possible rate hike.