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Indian Economy, Trump and Much Ado About US Fed Rates
- The US dollar plays an important role in global economics and Fed rates could have a profound and global impact, particularly noticeable in India.
- The impact of Fed rates was significant in India, which saw a significant change in inflows and outflows of foreign direct investment in equities.
- Investors look at the yield pickup from investing in a safe asset versus a risky asset as an EM, India is considered risky by US investors compared to US government bonds, US corporate bonds, or US equities.
- A higher Fed rate also weakens the rupee against the US dollar, which results in a higher purchasing cost for US dollar-based assets such as oil, resulting in direct inflation in India.
- Despite the post-election euphoria, there would be some, but not a lot, and not lower for much longer; US economists do not seem to give much importance to Reserve Bank of India's (RBI) rate cuts.
- The market expected that inflation would be controlled, leading to a consensus that there would be six cuts in the past twelve-month period. Clearly, we have not seen that.
- The Indian government has been able to significantly decrease US dollar expenditure and has maintained trading ties with Russia, becoming a significant non-dollar-denominated trading partner for Russia.
- The impact of changes in interest rates, which determine the cost of financing in US dollars, thus has, therefore, diminished quite significantly for the Indian economy.
- While policy changes under the Trump administration may translate into fed actions, the market prices a bit more, and those reverberate are not going to be felt at the Reserve Bank of India.
- India is currently more insulated from changes in US Fed policies than it has been in the past due to a unique set of global and macroeconomic circumstances.
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