No Fed cut: Market rally and hopes of a rate cut in India

While the rupee gained 50 paise against the dollar to hit 65.93, the benchmark Sensex at the Bombay Stock Exchange was up over 1.9 per cent or 500 points.

Written by Sandeep Singh | New Delhi | Updated: October 7, 2016 5:03:37 pm

Breathing a sigh of relief from the Federal Reserve’s decision to keep the funds rate unchanged and on rising hopes of a rate cut by the Reserve Bank of India in its upcoming monetary policy review meeting on September 29, the Indian currency and equity markets rose sharply on Friday.

While the rupee gained 50 paise against the dollar to hit 65.93, the benchmark Sensex at the Bombay Stock Exchange was up over 1.9 per cent or 500 points. In the afternoon trading hours while the Sensex was trading at 26,450, the broader Nifty at the National Stock Exchange was trading at 8,040.

The markets were nervous about the fact that a rate hike in US at a time when the emerging markets have already seen FII outflow (over concerns surrounding China) would have only increased the rate of outflow and brought their markets and currency under pressure. However, following the Fed’s decision there has been a relief rally.

Indian markets emerged as one of the biggest gainers on Friday as the hopes of a rate cut by RBI in its upcoming monetary policy review on September 29 have also strengthened.

“The US Fed’s decision to delay raising rates is positive for interest rates in India which we expect to come down. Indian equities continue to be a good long term investments despite emerging market redemptions,” said Nimesh Shah, MD & CEO, ICICI Prudential MF.

While Fed’s decision to not hike the rates this time around keeps the market guessing as to when it will start raising the rates, experts feel that Indian markets may witness some inflow of funds from institutional investors in the near-term and that may keep its currency and the equity markets stable.

However, a decision by the Federal Reserve to raise the rates in its next Federal Open Market Committee (FOMC) meeting will only bring the volatility back to the markets. And in that sense it is just a temporary breather.

In the meantime, while China and other emerging economies continue to suffer from slowdown, the Indian government and the central bank maintained that India is better positioned.

Speaking in Mumbai, on Friday, the RBI Governor Raghuram Rajan said, “India appears to be an island of calm…. Because of our demography, the abilities of our people and investment opportunities in the infrastructure space, I think that the arc of history is turning towards us.”

The Finance Minister Arun Jaitley while addressing a gathering in Singapore on Friday said that the government will continue on its reform agenda and will bring reforms on various fronts including those relating to taxation.

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