US might raise rates in 2015, says ADB

Says capital flows to India will remain stable even if Fed decides to raise rates

The US Federal Reserve might raise interest rate somewhat in the second half of this year, says the Asian Development Bank (ADB).

“The institutional view is that it is not immediately happening, it could happen somewhat in the second half of this year,” Johanna Boestel, principal economist, ADB, told reporters here on Tuesday.

The Federal Reserve has paved the way for the first change to its interest rates since the global financial crisis, as the economic outlook has improved.

In reference to raising rates, the word ‘patience’ was dropped in the latest policy statement issued by the Fed, implying the central bank could now move towards a rate hike. The Fed's target rate has remained static at zero to 0.25 per cent since 2008.

ADB projected India's current account deficit (CAD) to come down to one per cent of gross domestic product (GDP) in 2015-16 from expected 1.5 per cent in the current financial year. It is projected to again rise to 1.5 per cent in 2016-17.

As such, a low CAD would be easily financed by stable capital flows, Abhijit Sen Gupta, senior economics officer at ADB, said.

Boestel said capital flows to India would remain stable even after the Fed raises interest rates.

ADB also projects India's imports to contract 1.1 per cent in 2015-16. Export growth is projected at 3.2 per cent for the year. India's merchandise exports declined for three consecutive months till February this year. It seems difficult for the outbound shipments to meet even $314 billion of exports witnessed last year.