After the Fed decided to keep policy interest rates unchanged, the big question now is when will Janet Yellen hike the rates? For India, the pertinent point to ponder over is whether the Fed rate pause provides the RBI with a window of opportunity to lower rates this year and by how much. Bloomberg TV India spoke to Manishi Raychaudhuri, Asia Pacific Equity Strategist at BNP Paribas, to find out what the markets are expecting from the RBI in coming days.
A rate hike would have given a signal that global growth, specially led by the US, was back on track. Does this increase the risk for those looking into emerging markets, that all is not well but it could be worse than anticipated?
I think this move by the Fed underscores the extensive correlation that economies have today. A few years ago the economic turmoil in emerging markets and China would not have any inference on the Fed’s decision but today it does.
The FOMC (Federal Open Market Committee) also talked with higher emphasis on emerging markets’ turmoil, particularly in China.
Even the dot plot by the Fed actually indicates 15-20 basis points lower rates in 2016 and 2017 than in the June statement. In the near term, the uncertainty will continue for some more time. Our estimate is that the Fed rate lift up will begin sometime in December and we are attaching our 60 per cent probability to that event, which we think should act with an affirmation that the US growth is very much on track. The only thing, I think, they are waiting for is some degree of stability in emerging market growth and currencies, which hopefully should come through in the last quarter.
If India had a dotted plot and the RBI was to give it, then what are all the dots in September? What does it mean for the rates in India and for Raghuram Rajan?
I think what the Fed did today was opening up the possibilities of the Indian rate cut. Till recently the RBI Governor had been talking about the possibilities of the re-emergence of inflation but of course inflation in India has been way below. What the Fed did on Thursday should come as some kind of an assurance to the RBI. We were earlier kind of ambivalent on the late September rate cut in India.
But now, we think that is actually a slightly higher possibility than before. In general, we think that in the emerging markets monetary policy will continue to be loosened. We would expect more rate cuts in China as well.