Following the prevailing uncertainties in the global markets and in line with growing calls to defer its interest rate hike amidst the prevailing market volatility, the Federal Reserve decided to keep federal funds rate unchanged at 0-0.25 per cent for now. Market experts say that the decision would provide the markets a sigh of relief as a rate hike would have spooked already weak investor sentiments in emerging markets.
The foreign institutional investors have already pulled out over Rs 20,000 crore from the Indian equities since August 1, 2015 and over Rs 1,500 crore from the domestic debt following concerns of slowdown in China and other emerging markets, but Thursday’s decisions may ease the nerves for now and limit the fund outflows from emerging markets including India. “The decision to defer the rate hike has finally put at rest the confusion that prevailed in the market as the markets were nervous. While it is good for the risky assets such as India, the decision should lead to a relief rally in markets over the next few days before fundamentals take over,” said Ritesh Jain, CIO, Tata Mutual Fund.
While the market participants were prepared for a rate hike by the fed and an expected volatility in the stock market, debt and currency markets, the government and RBI too seem prepared for the same. On Thursday, Jayant Sinha, minister of state, Finance, said that India is well prepared for a rate hike. “RBI is well-prepared to deal with Fed rate hike and RBI governor is seized of the situation,” said Sinha adding that, “We have multiple layers of defence to deal with US Fed rate action which we have already built.” RBI has built forex reserves worth $350 billion to take care of volatility in volatility.
But now that the event has finally happened and it is known that there will be no outflows from the markets for now, the benchmark indices in India and across other emerging markets are set to witness gains.
While rupee is expected to trade stable against the dollar, both the Indian equities and debt markets are expected to remain stable.