The US Federal Reserve’s change in stance to no rate hikes in 2019 as against its earlier proposal of two hikes is unlikely to influence RBI’s decisions as India’s monetary policy is driven by inflation. However, lower Fed Funds Rate will help our external commercial borrowings, and retain FPI inflows into the country. Currently, the Fed rate stands at 2.25-2.5 per cent.
“As interest rates in India are poised only downwards, overall cost of funding may be expected to go down. Monetary policy action in India is unlikely to be influenced overtly as the target is inflation and while the external sector and the state of the rupee factors looked at when drafting the statement, the decision is driven by inflation and hence should not have an impact,” said Madan Sabnavis, Chief Economist, Care Ratings, in a note.
He added that an unchanged Fed interest rate regime will sustain FPI inflows especially in debt for some time. A weak and volatile rupee tending towards depreciation and higher rates in the US have kept FPI flows negative last year, which can get reversed. However, FDI inflows are unlikely to be influenced as they are driven by other factors like policy framework, and political stability.
Lower interest rates in the US would be useful for ECBs, where companies can continue to leverage the market under a stable forex currency regime. This window can be used more by Indian companies depending on the interest rate spread between foreign and Indian markets.
Importantly, this is positive for rupee, which will likely appreciate as an unchanged stance with possibility of a rate cut means that dollar would no longer be strengthening against other currencies and the dollar-euro equation is going to be fragile with the tendency to weaken.
However, the rupee movement will largely depend on other factors like Current Account Deficit (CAD), capital flows and oil prices.
“Rupee appreciation cannot be taken for granted even as the normal pace of depreciation expected of 3.5-4 per cent this year would get reduced. Further, the swap of dollars by the RBI from banks to inject liquidity will in a limited manner also restrain appreciation of the rupee,” Sabnavis observed.
According to the economist, the US economy isn’t getting stronger, indicating that the overall global growth will remain at best stable and will be primarily driven by countries like China and India.
“The fact that GDP growth, pegged at 2.1 per cent, is likely to slow down to 1.9 and 1.8 per cent in the next two years respectively, indicating that the fiscal stimulus in the past has not worked out fully to push overall growth. This may not resonate well with the government as it means that there’s still a lot of work to do on this front. Fed’s unemployment forecast has also increased from 3.5 per cent in December policy for 2019 to 3.7 per cent, which is expected to move gradually upwards to 3.9 per cent in 2021,” he explained.