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Rajan Expects US Fed to Raise Interest Rate by Up to 25 bps

RBI said it was expecting the US Federal Reserve to raise rates next week by between one and 25 bps.

Published: 12th December 2015 04:46 AM  |   Last Updated: 12th December 2015 04:46 AM   |  A+A-

KOLKATA: The RBI said it was expecting the US Federal Reserve to raise rates next week by between one and 25 bps.

“The Fed has prepared the ground and we are expecting that it will raise rates anywhere between one and 25 bps,” said Reserve Bank Governor Raghuram Rajan.

Speaking to media after the central bank’s board meeting here on Friday, he said, there was a 70-75% possibility that the rates would be increased.

It is widely expected that increase in interest rate by the US Fed may lead to flight of capital from India putting pressure on forex market.

The Fed is largely expected to make its first rate hike in almost a decade during its upcoming December 15-16 meeting following recent positive US jobs data.

Rajan said RBI doesn’t have independent assessment but looking at the market probabilities, there is 70-75 per cent chance of Fed increase. “I do not know how much it will be. My guess is not more than 25 bps. But it could be anywhere between 1 and 25 bps,” he said.

“I also think the Fed has prepared the way carefully for an increase. Likely at this point, they will go ahead,” he added.

According to Urjit Patel, Deputy Governor, RBI, it is almost certain that the Fed will raise interest rates next week. “After analysing the language used by Fed, we are expecting that interest rates will be raised by the US central bank,” Patel said adding that one could expect some changes in financial flows in the market. “Whatever decision the Fed takes, we are prepared for any eventuality,” Patel said.

Meanwhile, Rajan assured that the apex bank was open to buying bonds from the open market and will maintain adequate liquidity in the system as it has all the instruments at its disposal. “Our intention is to supply plenty of liquidity in the system,” he said adding, “We have all the instruments available with us. If required, the RBI may go in for purchase of bonds for long-term liquidity including open market operations.”

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Banks Told to Quicken Recovery Process

Stating that promoters have the strength to “impede any action” taken by banks to recover stressed assets, Raghuram Rajan said banks must quicken the recovery process and not postpone it. “In some cases, banks have been late in taking action. There are also many impediments as well and large promoters are strong enough to impede any action,” Rajan said adding, “The idea is not to postpone the day of reckoning. But banks have the wherewithals to accelerate the process to recover the assets.” It may be noted that CBI on Thursday had examined UB Group Chairman Vijay Mallya in connection with its probe into alleged loan default of `900 crore taken from IDBI Bank.



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