Fed hike to have muted impact on India, but rupee may bleed

The US Fed's much-delayed decision to hike benchmark interest rate by 25 basis points last night is likely to have minimal impact on Indian economy but the rupee may be impacted in the short-term, according to analysts.
In close to a decade, the US Fed increased the repo rate for the second time yesterday by 25 bps to between 0.50 per cent and 0.75 per cent. The first hike since the 2008 global credit crisis was in last December.
Market experts see the rupee trading in the range of 67-71 against dollar in the rest of the fiscal.
"We believe the impact of the Fed hike will be muted though the rupee can take a short-term hit," SBI Research said in a report.

Rating agency Icra said the impact on the rupee is expected to be relatively modest, given the country's large forex reserve (around USD 365 billion) in relation to the size of its current account deficit and FII holdings of debt.
"Once market liquidity and economic activity normalises, the sentiment toward the rupee may improve," Icra said, adding it expects the Indian unit to trade in a range of 67-70 against dollar in the remainder of FY17.

Kotak Institutional Equities, in a report, said factoring in possible realignment of global risk appetite along with expectations of further accommodation by the RBI, it expects the rupee to depreciate further and be in the range of 67-71 against the greenback.

"Even as the rupee weakens, the relatively strong macroeconomic fundamentals should lead the rupee to fare better than most of the emerging market currency basket," the report said.
According to global rating firm Moody's, emerging market exporters will benefit if the US growth translates into higher import demand which can negate the impact of the rise in American interest rates.
"However, a resurgence of heightened cross-border capital flow volatility in response to the Fed's tightening could have negative spillovers for those with large external funding needs, high leverage, macroeconomic imbalances, or uncertainties around politics and policies," Moody's said.
SBI Research further said there can be a commonality as far as fiscal stimulus is concerned between the US and India.

"India could take perhaps take the route of pump priming the economy post-demonetisation, but that may be through tax cuts as it may boost consumption, that have taken a hit in the last two months," SBI Research said.