Understanding the potential impact of USA's Fed rate hikeand Indian markets

Context: Recently, the US Federal Reserve has signaled a possible hike in interest rates soon, leading to a nervous reaction in Indian markets.

Impact of increase in rates in USA on India

Outflow of Foreign Capital

• When interest rates rise in the US, the gap between those and rates in countries such as India reduces, giving less incentive for foreign investors to pump money into overseas markets.
• This results in foreign capital outflows from equity and from debt.

Impact on Rupee

• Foreign Portfolio Investors pulling money out of the equity and bond markets could weaken the rupee even as the dollar gets stronger with the rate hikes.
• The adverse effect on Indian Rupee in turn, will hurt India’s forex reserves and imports.

Highest Cost of Fund Mobilization from Overseas Markets

• The rise in rates also means a higher cost of funds, and fund mobilization in overseas markets will be costly.
• The increase in the cost of funds will increase the cost of capital expenditure for India Inc, increase the cost of developing infrastructure for the government and strain the profit margins of companies.

Import-Export

• India’s exports on the other hand, notably IT and IT-enabled services, will benefit to some extent from a stronger dollar with respect to the rupee.
• Companies with large import bills may suffer, however, the same benefit may not fully accrue to exporters due to strong competition in the export market.