With the US Federal Reserve finally raising the interest rate by a quarter per cent, as was expected after seven years of a near zero rate regime, the global stock markets breathed a heavy sigh of relief. The Indian markets, too, were robust and the Sensex closed 309 points up after weeks of instability. The dollar also strengthened and gold lost some of its sheen, as was expected. RBI governor Raghuram Rajan had expressed confidence that the Indian markets and economy were well placed to meet any fallout of the Fed hike. In fact the rupee closed stronger against the dollar at 66.39 against Wednesday’s close of 66.68 to the dollar. This is such a contrast to May 2013 when the Fed had indicated that it was thinking of hiking rates. Since then the global markets — both equity and currency — had been badly hit.
The Fed’s announcement had created huge volatility that affected all economies and mauled their currencies. Fortunately India recovered as Dr Rajan made all the right moves to cushion the economy against volatility and the government took measures to strengthen the economy. Some analysts now see the rupee trading in a band of Rs 67 to Rs 69 against the dollar in the next year, but analysts are not always right. India should worry more about China depreciating the yuan as the two countries vie for the same markets and such a move would also make Chinese imports cheaper. Indian industry is already reeling under dumping of goods by China, specially steel. Companies that have high exposure to dollar loans through the external commercial borrowing route will face a problem as the dollar strengthens and makes their debt more expensive. Also, companies that have significant investment from foreign institutional investors may face a few problems if the FIIs decide to withdraw some of their investments.
Fed chief Janet Yellen indicated that the season of tight monetary policy had started but it would be gradual as they would watch the impact of this hike. She said they would have an accommodative policy that would depend on the state of the economy. But for now the uncertainty over whether or not the Fed would raise the rate is over and it will be some time before the guessing game starts for the next hike. Wednesday’s hike also indicates that the Fed feels the recovery of the US economy is stronger than envisaged earlier and that there has been growth in private spending and an improvement in the housing sector and labour market. This is good news for exporting countries. However, the Fed’s inflation target of two per cent is still a long way off and this, too, would play a part in the Fed’s next move.
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