The interest rate hike by the US Federal Reserve will bring volatility and uncertainty in capital flows into emerging market economies, but India is very well cushioned to absorb the impact, Chief economic Advisor Arvind Subramanian said Thursday. He said that the 0.25 per cent rate hike by the US Fed was on expected lines and India with strong macro economic fundamentals is “less anxious” than other markets.
“The US interest rates are rising and dollars are rising. Of course, there will be some reassessment and money will flow from emerging market to US at least for some time. But in that, we will be less affected than other countries,” he said at an Assocham event here. With economic growth picking up since the middle of the year, the US Federal Reserve raised interest rate yesterday — the second time in a decade. It had last hiked rates in December 2015.
“This was anticipated and expected. The Indian economy is very well cushioned to absorb the impact of that. I think the RBI policy also took an account of this in a sensible way. I think there will be some short-term things, but we need not worry on that,” Subramanian said. The benchmark BSE Sensex fell 141 points in opening trade today, but later recovered and was trading 42 points higher in post noon trade.
“The RBI took the right call on this. In this period of volatility and uncertainty, we need to have a strong macro economy which we have. I am a little bit less concerned about that,” he said. Last week, the RBI maintained a status quo on interest rates, saying it wants to wait and see how the impact of demonetisation and US Fed rate hike play out. He said that there has been a big flow of funds from emerging markets, but given that India is a bright spot, the impact will be much less.
Asked about spike in oil prices after OPEC and non-OPEC members agreed to cut production for the first time since 2008, he said that the oil market has evolved in the last 5-7 years and there is a natural kind of ceiling on how high the price can go because of shale oil and shale gas. “If the prices go up and down, there will be som implication, but I don’t think the oil prices are going to surge to a level which is difficult for Indian economy to handle,” the chief economic advisor said.
Oil prices rose to a 17-month high after a deal between OPEC and non-OPEC members but tumbled after the Federal Reserve raised interest rates for the first time this year. While West Texas Intermediate oil dropped USD 1.94 to USD 51.04 a barrel on the New York Mercantile Exchange, Brent fell USD 1.82, or 3.3 percent, to USD 53.90 a barrel.