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US Fed keeps rates on hold, hints at hike later

28 July, 2016

In what came as a huge relief to emerging markets including India, the US Federal Reserve on Wednesday kept interest rates unchanged for now, even as it signalled a possible rate increase later this year.

“Near-term risks to the economic outlook have diminished,” the Fed said in a statement following a two-day meeting. Holding out an optimistic scenario, the Fed said that with “gradual adjustments” in monetary policy, it expects economic activity to grow moderately and sees labour market indicators strengthening.

An immediate impact of the Fed’s decision was visible as the Indian rupee gained 0.2% against the US dollar during the day, in line with other Asian currencies. The dollar fell below 67 against the rupee before rising above the mark again later in the day.

The rupee’s strength, however, was also due partly to the fact that the Union Cabinet had cleared key amendments to the Goods and Services Tax bill late on Wednesday, raising chances that the same might soon be passed by Parliament.

However, the Fed did leave open the possibility of a rate hike as soon as September or December this year. If that happens, the US dollar could gain against the rupee and inflows into the Indian markets could be hurt.

In the immediate timeframe though, the Asian markets including India, would be looking towards the Bank of Japan which began its two-day policy meeting, and will announce its decision on Friday. Japan is preparing a $265.3 billion dollar stimulus package to rev up the country’s sagging economy.

Buoyed by a good monsoon and the possibility of a fall in the prices of pulses, the Reserve Bank of India (RBI) is expected to cut interest rates by up to 25 basis points in August, a Bank of America-Merrill Lynch report had said earlier this week. In June, outgoing RBI governor Raghuram Rajan had cited rising inflationary pressures for not reducing interest rates.

Although both the BSE Sensex and the National Stock Exchange’s Nifty traded flat for most of the day, the indices did perk up towards the end of trade. While the Sensex bounced 184.29 points to close at 28,208 points, the Nifty gained 50.50 points to end at 8,666.30.

Among the top gainers on the NSE on Thursday were Asian Paints, ITC, Bharti Infratel, Eicher Motors, Maruti Suzuki and Sun Pharma.

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US Fed keeps rates on hold, hints at hike later

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