After U.S. Fed Rate Hike the Indian Rupee Appreciated Versus Dollar
In the summer of 2013 the U.S. Federal Reserve announced its plans to start reducing the amount of bonds it purchased on a monthly basis. Although it would not taper its quantitative easing for another eight months, the market reacted by selling off emerging market currencies in what then named the "taper tantrum". The Indian rupee was one of the emerging markets hit by the resulting outflow that depreciated the currency by 6.05 percent in the following 30 days. The Canadian dollar (CAD) appreciated 0.83 in comparison in the same time period following the announcement from the Fed. It would be until February of 2014 that the Fed would start tapering its quantitative easing (QE) program that officially ended in the fall of the same year. After that first announcement in 2013 the process of monetary policy tightening finally arrived on Wednesday, December 16 with the first U.S. interest rate hike in nine and half years.
The macroeconomic conditions of 2013 had changed radically from those at the end of 2015. The price of oil is close to 7 year lows and deflation continues to threaten major economies. The Indian rupee (INR) had taken a hit two years ago, but it did in fact shrug off the aftermath of the hike of the U.S. benchmark interest rate by 25 basis points. The INR appreciated by 0.13 percent a day after the historic decision by the Fed. The CAD in comparison depreciated by 3.72 percent as the USD is gaining on a monetary policy divergence that could see Canadian rates go negative.
Energy prices had supported the Canadian economy following the credit crisis, but oversupply driven by new technologies and a market share strategy by the Organization of the Petroleum Exporting Countries (OPEC) has the loonie falling against the dollar. India as a crude importer has benefited from cheap prices and is engaging in open dialogue with the OPEC after attending the last meeting of the organization in Vienna as an observer.
Indian growth has accelerated since the INR was labeled a fragile currency following the taper tantrum. The Indian economy is expected to grow 7.4 percent in 2015 beating market expectations and a far cry from the 4.5 percent growth in 2013. Inflation is 5.3 percent, almost half of that present 2 years ago and with energy forecasted to keep near current levels as global supply is expected to increase beyond the growth in demand.
The market's anxiety about the timing of the Federal Reserve decision to raise the U.S. benchmark interest rate has passed. The market will now focus on the next move by the American central bank, but global economic conditions and the U.S. presidential election in 2016 will limit the ability of policy makers to raise the rate to near the median rate predicted by Fed members of 1.375 percent by the end of the year which will limit the impact on Indian corporate debt denominated in USD.
The stability of the INR after a major milestone after the recession validates the strong growth of the Indian economy. The variables that brought about this remarkable recovery will not change dramatically in 2016, which will bring growth opportunities to the economy of India.