Buoyant over India’s economic growth recovery, the Reserve Bank of India (RBI) Governor Raghuram Rajan has asserted that India is better prepared to handle the impact of interest rate increases in the US as foreign funds are not likely to exit the country due to signs of an upturn in economic growth.
Since December 2008, Federal Reserve kept interest rate near zero to improve the country’s economic growth. Improving US macro-economic data has raised expectations that the Federal Reserve will soon increase the interest rates. Any decision by the Fed to raise rates will have implications for economies like India, as it could lead to capital outflows from emerging markets particularly those running with high current account deficits.
Meanwhile, India has taken a lot of measures to contain the CAD. Curbs on gold imports, such as higher duties and 80/20 rule, have dramatically helped narrow India's current account deficit to $32.4 billion in the FY14 from $87.8 billion a year earlier. On the other hand, India also built up its foreign exchange reserves driven by recently taken measures which helped banks to raise around $34 billion in overseas loans and deposits from the Indian diaspora. Improving trade deficit coupled with the falling global crude prices leading to decline in government's fuel subsidy bill also improved the country’s overall economic situation. As per the economic survey 2014, Indian economy is likely to grow in the range of 5.4 to 5.9 percent in FY15 overcoming the sub-5 percent GDP growth over the past two fiscal years.