Fed Rate Hike And Its Impact On Emerging Markets

According to Goldman Sachs, improving US economy with falling unemployment rate will lead US Fed to raise interest rates 4 times in 2018. Moreover, US Oct inflation numbers that shows 1.8% YoY increase in core inflation makes Dec interest rate hike more likely. Emerging countries with weaker economies will be severely hit because a rate hike will trigger capital outflows from these economies. This is because money will flow towards US markets as the interest differential between emerging markets and US market falls. The impact of US rate hike was visible during 1997 Asian financial crisis that lead to economic collapse in several Asian countries including Thailand, Indonesia & Malaysia. Capital outflows leads to contraction in economic activity, increase in external liabilities and increase in interest rates. Let us look at how Fed rate hike impacts India:

Economic growth: The Indian economy is on a path of recovery after exogenous shocks of demonetization & GST. Fed rate hike could reverse the foreign inflows that are much needed for the economic growth. FPIs have invested over 4.9 billion USD in equities and over 21.7 billion USD in debt till October this year.  In addition, it will create upward pressure on domestic interest rates that will affect new projects, expansion plans & increase unemployment.

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Source : http://www.businesstoday.in/current/world/how-fed-rate-hike-impacts-india/story/264422.html

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