Will US interest rate hike put pressure on India?
The US Federal Reserve Chair Janet Yellen hinted at an interest rate hike later this year, on the back of an improving US economy.
If the US hikes its interest rates in September, as is now expected, the emerging markets, including India, are likely to see atleast one sell-off in the coming months.
The emerging markets may feel some pressure because the global monetary liquidity will be reduced by the US increasing its interest rates.
On Friday, Yellen in a much-awaited speech at Jackson Hole, Wyoming, although did not indicate when the US might hike rates, her comments reinforced the view that a move could come later this year. The Fed has policy meetings scheduled in September, November and December, a Reuters report said.
"I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen said.
If the US Fed does in fact decide to hike its rates, it will also put pressure on the rupee. The rupee is set for a vulnerability ride with the Foreign Currency Non-Resident (FCNR) accounts maturing in September which will lead to an outflow of nearly $20 billion.
A rate cut from the Federal Reserve will strengthen the dollar against its basket of emerging market currencies, including the rupee, putting more pressure on the Indian unit.
Soumyajit niyogi, Associate Director, India Ratings, told The Hindu BusinessLine in a report, that "India could see increased market volatility. Between September and November, India will witness a likely $26-billion outflow of FCNR-B deposits, raised under a special Reserve Bank of India scheme in 2013. A possible US rate hike could add to the outflow."
The RBI may aggressively intervene in the Indian forex markets to stabilize the currency.
At the same time, the commodities market in India will also take a hit. This is because most of the commodities traded on the exchanges here are dollar-denominated.
Apart form this, sectors like Oil & Gas may also see a correction as a strong dollar will increase the price of imported crude oil. The import-heavy metals sector may also see some pressure.
Export-oriented sectors like the IT, pharmaceutical, textile sectors, may see some benefits because of the strong dollar.