Hyderabad: The country may see some capital outflow and weakness in stocks following the rate hike by US Federal Reserve, but the negative impact is not expected to be severe, former RBI Governor C Rangarajan said on Thursday.
"There could be some outflow because expectations are that the rate of return in the American economy will be better...some capital will move out (of India)", he told PTI in an interview, but hastened to add: "I expect the negative impact of that outflow not to be very great, but the inflow may be somewhat lower than before".
Rangarajan, a former Chairman of the Prme Minister's Economic Advisory Council, added that India's situation on the balance of payment side is reasonably under control now.
"It (balance of payment) is not like what happened a few years ago...when the outflow happened...the current account deficit was high.
"Even though exports are not doing that well (now), there has been decline in imports also because of the fall in oil prices. Therefore, our current account deficit is less than two percent. That's manageable," he said.
There could be some impact on stock prices, but since the impact of the rate hike on capital outflows is not expected to be strong, its effect on the stock market too is likely to be limited, he said.
"There could be some decline in stock prices immediately", Rangarajan said.
As for whether gold prices would fall as a result of the rate hike, he pointed out that prices of the precious metal have been falling for quite some time and the Fed's decisionis not likely to have any impact on them.
"But there are factors operating which are bringing the gold prices down," he said.
Asked if he sees the possibility of the rupee falling to Rs 70 versus the dollar, Rangarajan said he does not think so.
"We are around Rs 67 a dollar now, I think it will stay around that level. I don't see any sharp decline in the value of rupee," he said.
On whether bond markets would face significant strain, he said, "Bond markets is the one that could be affected immediately because interest rate differentials...will come down as a consequence.
But on the whole, while there will be some negative impact, it may not be very severe.
Rangarajan said prices of imported goods would be affected depending on what happens to the rupee.
"Only if there is a sudden decline in the value of the rupee, the import cost will go up. But my own estimate is that impact on the value of the rupee will not be that much. There could be some immediate pressure on the rupee but not like what happened a few years ago," he said.
The hike would make investment in debt instruments more attractive in the US than elsewhere, Rangarajan said.
Stating that the hike of interest rate by 0.25 percent by Federal Reserve last night is along expected lines, he said it implies that the US central bank is convinced that the American economy is improving.
"This will have favourable impact on rest of the world and India's trade with the United States can grow if the American economy continues to improve," he added.
