US Fed signals delay in rate hike, buys RBI more time

The Indian markets rallied and rupee hit a two-week high of 62.35 against the US dollar on Thursday after the US Federal Reserve took a more cautious stance towards a rate hike. This clears the air as the first rate hike in almost a decade—which was expected to come as soon as April—now gets pushed by at least two months.

The impending rate hike by the US central bank has repercussions for economies around the world as it sucks out dollar from other markets back to the US as a safe haven. This potentially leads to depreciation of other currencies, especially those of the emerging markets, including India, thereby affecting foreign investors as their dollar value of investment in the country shrinks.

In a statement last night Fed decided to drop the word "patient" from its guidance, indicating that the US central bank is moving closer to hike rates for the first time in several years. But it added that it may not come soon enough.

“Just because we removed the word patient from the statement doesn't mean we are going to be impatient,” US Fed chairperson Janet Yellen, said at a press conference after the Federal Open Market Committee (FOMC) meeting on Wednesday, highlighting that the bank was in no hurry to raise borrowing costs.

"When the committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent," FOMC press release stated.

The current policy stance has left analysts confused as to the timing of a rate hike. While some are betting on a June rate hike, others say an upward revision in September is more likely. There are a few who also believe that the Fed may not even hike rates this year.

Indeed, this is partly due to the new outlook on the US economy. The Fed made downward revision to its growth and inflation outlook with many of its FOMC members revising their rate projection.

Meanwhile, the bulls on both sides of the Atlantic have read a positive note in the US Fed's statement. While Wall Street interpreted dropping of the word 'patient' as an indication of an early rate hike, others, especially those in Asia, see the modest downgrade in the economic growth outlook in the US as a cause for cheer. This is because they think this would delay a rate hike.

This has led to a rally in stock markets across Asia with both Indian benchmark stock indices trading higher by over a per cent. The Indian rupee also hit a two week high of Rs 62.35 against the dollar.

A prospective delay in US rate hike spells positive development for India as it means short to medium term institutional investors, who have buoyed up the stock markets, may not start selling shares, at least not too soon.

According to Vishnu Varathan, senior economist & head economics, markets & strategy at Mizuho Bank, the Fed hike delay buys RBI more time.

He points to RBI governor Raghuram Rajan being one of the more outspoken central bankers in the world to suggest that the Fed rate hikes, if they come too abruptly and in too aggressive a cycle, could be disruptive for emerging markets.

“This deferring of the rate hike and scaling down of pace of hike expectations in a way is more in line with what governor Rajan must see and (it can be said that) RBI has got more space to implement its policy based on domestic conditions rather than concerns of how global market would be reacting," Varathan said.

RBI, which had reversed its cautious stance on rate cuts in India, has twice wielded the scissors this year in the light of inflation being under control and industrial investments yet to see any improvement.

More clarity on the short-term direction, whether another cut or a status quo till the impact of the recent cuts gets absorbed in the economy, would come within the next three weeks as the RBI is scheduled to meet on April 7 for its first bi-monthly monetary policy review of the new fiscal.

(Edited by Joby Puthuparampil Johnson)

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