US Federal Reserve Chair Janet Yellen recently hinted at a hike in the interest rates in an upcoming meeting of the central bank. However, she also flagged considerable uncertainty over economic policy under President Donald Trump's administration.
In December 2016, the Federal Reserve had raised rates for the first time in 2016 by 25 basis points to between 0.50 per cent and 0.75 per cent. It further pledged a gradual pace of increase as indicated by three increases expected in 2017. The fed funds rate controls short-term interest rates and includes banks' prime rate, the LIBOR.
Hikes in US interest rates are concern for emerging economies as they have a negative impact on them. However, for India the move isn't very concerning as some of it is already priced in the markets. Let's explore what a Fed rate hike would mean for the Indian economy.
Stock markets: The foreign institutional investors have already been pulling money from the equity market. The correction in the market started long before because of the speculation.
Gold: Gold prices are highly sensitive to rising US interest rates, however, the demand for this yellow metal is still strong due to looming uncertainties.
Indian currency: Rupee may come under pressure and could depreciate further because of an increase in interest rates.
Imports: It could inflate our import bill.
Inflation: And could put pressure on inflation which has otherwise remained sticky off late.
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