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16
December 2016
The US Federal Reserve hiking its key
interest rate by 25 basis points could set off capital outflows from emerging
market economies like India with large external funding needs and
macro-economic imbalances, thereby increasing their vulnerability, Moody's
Investors Service said on Thursday.
"While the impact of the rate
increase on the US economy will be negligible, emerging market economies with
large external funding needs and macro-economic imbalances could be vulnerable
to capital outflows," Moody's said in a report. The Total Investment & Insurance Solutions
The Federal Reserve on Wednesday
increased its key interest rate by 25 basis points in the first rate hike in
2016 and just the second in a decade. The first was in December 2015.
It raised rates by 0.25 percentage
points to a range of 0.50 per cent and 0.75 per cent.
"While emerging market economies
could benefit from a strengthening US growth if it stimulates demand for
exports, they could also suffer if higher US rates lead to a more sustained
re-pricing of financial assets and tighter global financial conditions,"
the credit rating agency said.
"The most direct impact will be
felt in those economies that have high external financing needs relative to
their foreign exchange earnings and reserves," it added. The Total Investment & Insurance Solutions
The American agency said the spillover
effect of the rate hike may manifest itself in different ways.
"For instance, in some cases a
pronounced currency depreciation could lead to higher inflation, which, along
with the threat of sustained capital outflows, could force central banks to
raise interest rates," the report said. The Total Investment & Insurance Solutions
"The (US) Fed's tightening could
have negative spillovers for those with large external funding needs, high
leverage, macroeconomic imbalances, or uncertainties around politics and
policies," it added.
The Federal Reserve slashed rates to
zero in 2008 in the wake the financial crisis and kept it at that level
throughout the period of major economic slowdown that followed.
In this connection, when previous
Reserve Bank of India Governor Raghuram Rajan took charge at the RBI in 2013,
at a time the US Federal Reserve had declared its intent to wind down its
stimulus programme, the rupee plunged in value in respect of the US dollar on
fears about a spiralling current account deficit. The Total Investment & Insurance Solutions
In a series of measures, Rajan managed
to stabilize the currency that also brought back investors. Giving Rajan its
Central Banker of the Year award for 2015, British magazine Central Banking
said in this regard that "Rajan's disciplined and focussed approach in
leading the Reserve Bank during his first year as governor was remarkably
impressive." The Total
Investment & Insurance Solutions
India is currently seen as being better
equipped than other emerging markets to ride the impact of higher US interest
rates because of its stronger economic growth and impressive foreign exchange
reserves of more than $300 billion. The Total Investment & Insurance Solutions
Chief Economic Advisor Arvind
Subramanian said in New Delhi on Thursday that the hike in US interest rates
"was anticipated and expected". The Total Investment & Insurance Solutions
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