US Federal Reserve decided not to immediately hike interest rates, surprising many who had expected to see rate moving up in the world’s top economy after several years. The delay in impending rate hike in the US that would help curb outflow of investments from India is good for the country.
The US Fed cited dwindling global economy as a key factor to keep rates unchanged for now.
Federal Open Market Committee (FOMC) acknowledged that the US economy was improving with solid job gains and moderate increases in business investment and household spending, but added that global concerns may hold the economy down.
“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” FOMC said.
Indian stocks, rupee and bonds gained with the 30-stock benchmark index Sensex up 1.8 per cent or 461 points on Friday. The rupee also added some lost muscle moving up 65 paise to a three-week high of 65.80 against the dollar.
While a delayed rate hike only provides a temporary respite for markets across the emerging economies, it sets a solid stage for Reserve Bank of India to cut policy rate further.
RBI likely to cut rates
Low inflation and still tentative industrial recovery had previously created the right atmosphere for rate cut but RBI has been wary of a sulking global economy. A delay in rate hike can prompt the central bank to cut rates as the next decision on Fed rate may not come till December.
Despite the RBI delivering three rate cuts of 25 bps each since the start of the year, credit growth has remained subdued and investment hasn’t picked up. With the market expecting the impact of rate cuts to translate into better momentum in the economy in the second half of FY16, the RBI may go for more rate cuts to boost the investment and credit cycle.
FIIs expected to reverse outflows
Another impact of the delayed rate hike may come in the form of calming investors in the Indian market. India has seen a massive outflow of capital, with net fund outflows to the tune of Rs 17,000 crore since the start of the fiscal, with investors flocking to safe haven assets partly due to the impending rate hike. A deferred decision may stem the outflow of investments from India thereby calming the jittery markets.
Rupee unlikely to fall further
Rupee is also expected to curtail its fall against the greenback. Since the start of the fiscal the currency had lost 8 per cent of its value touching 67 against the dollar as demand for dollar increased due to outflow of FIIs. But with the rate hike delayed dollar demand will fall, the free fall of Indian currency is expected to stop.
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