Indian markets reacted calmly to the first increase in interest rate in nine years by the U.S. Federal Reserve. The Fed raised its key rate to quarter percentage points from zero. A key factor is a very responsible and benign language on further increases in interest rates.
Indian stocks opened higher in line with other Asian markets before trimming gains. The rupee too gained against the dollar in opening trades. Central banks and markets across the globe were waiting in nervous anticipation of the much delayed decision by the U.S. Federal Reserve. The reaction across the globe has been almost an anti-climax of the build-up.
"The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run," the Federal Open Market Committee said in its statement.
Yet, the good news is an official recognition that the U.S. economy is out of its slowdown with unemployment rates at a decade low and a pick-up in spending.
"Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft," said the Federal Reserve.
"A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year."
Foreign portfolio investors have been withdrawing funds from emerging markets, including India, in anticipation of the rate increase. Estimates put the withdrawals at $500 billion from emerging markets.
The Indian government’s response was calm.
"The Fed hike is on expected lines. The accommodative outlook is good," economic affairs secretary Shaktikanta Das told reporters in New Delhi.
"The good news is there is sustained recovery in the US, which bodes well for emerging markets such as India."
Going forward, the Fed will likely be watchful of events in emerging markets before deciding on monetary course, Das said.
Higher U.S. rates make it tougher for companies with large overseas borrowings.
"The elimination of uncertainty post the Fed event emerges as a major positive for domestic bond market, which has been witnessing foreign outflow," said Bansi Madhavani, Analyst, India Ratings & Research.
"Outflow from India is likely to moderate. Ind-Ra believes future inflow is likely to be more long-term flow than ‘hot’ money."
