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prelims Test Series 2019
अंग्रेज़ी सीखने का अवसर (कक्षा प्रारंभ : 5 अक्तूबर, शाम 6 से 8)
Q. Fed rate hike and its impact on India: Discuss the impact on India economy due to America’s Federal policy rates hike.
Dec 16, 2016 Related to : GS Paper-3

Ans :

Introduction-

Recently America’s Federal Open Market Committee (FOMC) has decided to raise policy rates by 25 basis points. This fed rate hike is the first such move since December 2015 and the second in a decade.  The decision of fed rate hike have multiple impacts on Indian economy like inflation, outflow of FIIs etc.

Impact on Indian Economy-

  • In the backdrop of demonetisation, Indian markets saw the out flow of Rs 20,000 crore foreign institutional investors (FIIs) in November. The outflow of investment still continued.
  • Capital outflow may accelerate after the fed rate hike announcement as money flows to safe havens like US Treasury bonds. The rupee has weakened against the dollar, our main trading currency.
  • Depreciation of Rupee against the dollar will boost import costs, and it is bad news for India, as it is a net importer. 
  • Worryingly, crude oil prices have doubled over the year. Still price of crude oil is rising and it may leads to inflation and policy makers should prepare for higher inflation.

Conclusion-

Fed rate hike has multiple impacts on Indian economy like higher inflation, outflow of capital as discussed above. If the capital flight is avoided, then fed hike does not bear any measure impact. Given these trends, India’s policymakers must take measures to counter capital flight, depreciation of currency and higher inflation.


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