Fed move lifts demand for RBI rate cut
The decision of the US Federal Reserve to postpone the first hike in interest rates in nine years seems to have paved the way for the Indian central bank (RBI) to cut interest rates by the end of the month.
With the threat of a US Fed action averted possibly till December as it cited global economic weakness, emerging markets, including India, heaved a sigh of relief. The cheer was seen in the currency markets as the rupee ended at 65.67 to the dollar, gaining more than 74 paisa, its biggest daily gain since September 2013.
Bourses also gained as the benchmark BSE Sensex rallied 255 points to close at nearly three-week high of 26,218 points on rate cut hopes.
While the pitch for a rate cut is getting more pronounced, RBI Governor Raghuram Rajan today continued to emphasise keeping inflation under check and cautioned on chasing growth too quickly.
“The key task is to keep inflation low, not just today but well into the future,” the Governor said while delivering the “Fourth C K Prahalad Memorial Lecture” organised by the Ananta Aspen Centre and Confederation of Indian Industry (CII) in Mumbai.
Rajan said, “We have to be careful while pursuing growth and have to make it sustainable.” He said that keeping inflation low on a sustained basis is key to achieving this target.
Rajan stressed that in difficult times, environment for growth has to be achieved in the right way by working hard towards recovery and aiming at sustainable growth. “While the monetary policy will be accommodative, there is room to expand sustainable growth potential. By continuing with government reforms, a sustainable growth potential can be achieved,” the RBI Governor added.
India hails Fed move
The government today said the US Fed move was positive for India. Economic Affairs Secretary Shaktikanata Das today said the decision was good for emerging markets like India and provided space for policy adjustment.
“The Federal Reserve decision seems good for the emerging markets,” he said, adding it provides room for authorities for policy adjustment.
Analysts are predicting that the RBI will cut rates after the US Fed no show. A research note by DBS group said the receding external event risks paved the way for the RBI to cut repo rate by 25 basis points later this month.
A note by Kotak Institutional Equities said the Fed chose to delay the rate lift-off owing to global headwinds from China and EMs, despite noting its domestic economic improvements.
“This short window of opportunity strengthens our call for a 25 bps rate cut by the RBI in the upcoming policy, amid comfortable domestic inflation dynamics,” it said.