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Last Updated Friday March 24 2017 01:30 PM IST

Can India measure up to the Fed rate hike?

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Can India measure up to the Fed rate hike? RBI governor Raghuram Rajan and US Federal Reserve Chairman Janet Yellen. (File photo)

Kochi: The US Federal Reserve, which is in session to decide on a hike to its main interest rate, can influence fuel prices, value of the rupee, note transactions, shares and real estate with its decision that is expected on Wednesday.

The decision of the Federal Open Market Committee would be known by late night on Wednesday. The current rate is at 0-0.25 per cent and has remained there since December.

The Fed had intimated that it would soon hike rates, two years ago. However, the hike could not be implemented because of the poor economic condition in the US. Now that the nation has bettered its financial position, the Fed might not find it necessary to maintain the status quo. The hike is expected to affect not only India, but the whole world. According to Moody's Investor Services, the rate hike could affect emerging nations such as the BRICS nations more than others. The singular effect in India was however not highlighted by the agency.

The impact would depend on the hike. Rates higher than 0.25 per cent would have more impact on the world economy.

Indian central bank governor Raghuram Rajan said that he was expecting the US Fed to implement a 0.25 per cent hike and said that India was ready to face capital outflow following a hike.

When the Fed had hinted in 2013 that it was planning to increase rates, world markets had felt the tremors. The effects expected are:

A fall in the price of gold, which is at its lowest price in the last six years. Bank of America Merrill Lynch has predicted that in the New Year, the cost of gold would touch $965 per ounce.

The effect on real estate could be less because direct foreign investments in real estate have been minimal.

The share market would be significantly affected because shares had picked up because of foreign investments. In the past five years, about $10, 200 crores have been invested in Indian markets. When rates are hiked, that money would start to leave the country and shares would have to face a massive correction. The bond markets would also have to face significant strain.

The price of fuel could decrease because no oil producer is ready to cut production even as global demand for oil has dropped due to various reasons. Now that sanctions against Iran have been lifted, that nation would also be allowed to sell its oil in the open markets, which would further drop the prices of oil. While India, which depends on imported oil, can benefit from the drop in prices, the cost of importing the oil would go up.

The withdrawal of dollars would make it dearer, which in turn would lower the value of the rupee. Analysts believe that the one dollar could be worth as much as Rs 70. This would also put a strain on the current account deficit, which would increase inflation. This in turn would decrease ratings on India, which would further lower foreign investments in India. Prices of all imported goods would increase.

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