India is facing a 'dollar winter' almost naked.

Ajit Ranade, Chief Economist at Aditya Birla group, thinks that "A dollar winter is coming". Yesterday, the Federal Reserve in the US raised interest rate by 25 basis points, to between 0.5 and 0.75%. The last time the Fed raised interest rate was in December 2015, which was 7 years after it raised rates in 2008. The bond market had priced in the increase as yields of benchmark 10 year treasuries have risen to 2.57%, after dropping to around 1.3% in July. The Federal Reserve has indicated that it may raise rates another 3 times next year. This is because it sees inflation rising due to a tight labor market, rising oil prices and increased spending by the new government of Donald Trump. The price of crude oil has risen to $56 per barrel, from below $40 per barrel around June 2016, after oil producers, such as OPEC and Russia, agreed to cut output. Some are predicting a price of $75 per barrel by New Year, as winter increases demand for heating oil in the US and Europe. However, there is an upside restraint on the price of oil and that is shale oil production in the US, which will become profitable at prices above $60 a barrel. If US interest rates rise investors will move back into the US which will make the dollar stronger. "So, 2017 promises to be a year of dollar strengthening, and US yields hardening," writes Ranade. That is confusing. Because if investors pile into US Treasuries their prices will rise and yields should fall. A strong dollar should help emerging economies by making their exports cheaper, but apparently that is not the case. A strong dollar in 1979 resulted in the Latin American debt crisis and in 1985 a dollar bought 250 Japanese yen. (It is at 117 today). That resulted in the Plaza accord, which ended Japan's asset price bubble, resulting in a prolonged deflation in Japan. The 1997 East Asian crisis was the result of a sharp devaluation in the Chinese yuan, starting in 1994. China's foreign currency reserve declined by almost $1 trillion this year, to around $3.12 trillion. Trump has promised to levy higher taxes on Chinese imports which could hit China's economy. China is sitting on mountain of credit and a slowdown in the economy could precipitate a crisis. That could precipitate severe social unrest, even a civil war, in China, very satisfactory for us in India. But what happens to India? Although retail inflation has fallen to 3.63% in November core inflation, which strips out food and fuel, was steady at 4.9%. If foreign investors sell out of Indian bonds and equity the rupee will fall which will add to the cost of fuel, increasing retail inflation. Spending will be severely restricted due to the sudden banning of high denomination notes. There is a real danger of stagflation. Ranade does not say so because he does not want vindictive politicians on his back. We cannot control what Trump does and there is no way of going back on demonetisation. We are sitting ducks.