By Devanshee Dave
Following a two day meeting, the US federal reserve bank has finally hiked its target interest rate from 1.25% to 1.50%. This is the fifth time in the past two years that the rates have been increased. In September, Fed officials declared that a three-quarter point increase should be expected in the next year and two more such raises each in 2019 and 2020.
Updated Fed economic forecasts
At the time of the great recession in 2008, the Fed cut the interest rate to 0%. The recent increases have raised the rate back up to its 1.5% target. In its most recent meeting, the central bank took the decision to raise the rate by a vote of seven to two. After the meeting, Fed Chair Janet Yellen explained her confidence in the economy, “At the moment the U.S. economy is performing well.” She added that “The global economy is doing well. We’re in a synchronised expansion. This is the first time in many years we’ve seen this.”
Officials are also predicting higher economic growth for the coming years as a result of tax cuts. In light of this, the Fed has raised its estimates for the country’s Gross Domestic Product for 2018 from 2.1% to 2.5% while the GDP for 2019 is now expected to be 2.1%, up from 2.0%, and for 2020 it has been forecasted to be at 2%. As a result of this, the unemployment rate has been forecasted to drop from 4.1% to 3.9% in 2018/9. Finally, the inflation rate is expected to rise in 2018 to 1.7% from 1.6%.
What implications does this have for India?
As usual, any change in the Fed’s interest rate will affect emerging markets such as India. The first impact is on the Indian Rupee, which will now come under pressure from a rising US dollar. This can lead to increase in external debt, particularly the portion of India’s debt that is denominated in US dollars. For 2015-16, India’s external debt was $485.6 billion out of which 57.1% was denominated in American dollars. This rate change will make it difficult for India to cut its external debt.
The second implication for India will be on the companies borrowing capital from foreign sources. The cost of loan repayments for such companies will now increase, which will negatively impact their balance sheets. There is an inverse relationship between the American dollar and gold prices. However, other impacts, such as a weaker Indian Rupee, pressure on India’s inflation rate, and on imports and exports will only be short-term. The overall impact of the Fed’s rate rise on the Indian economy is expected to be negative but limited.
Featured Image Source: Flickr
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