<div><strong>By Sumit Sharma</strong></div><div> </div><div>Decision by the US Federal Reserve to leave its key interest rate unchanged may have just opened a window for the Reserve Bank of India (RBI) to bite the bullet and lower its repo rate on its September 29 monetary policy meeting, or even earlier. </div><div> </div><div>The RBI has favourable domestic economic parameters to help lower its repo rate. It has been, like other central banks across the world, watching out for guidance from the Fed meeting and its implication on global markets. Any early rate cut by RBI will be welcomed by industry and come very handy as finance minister tries to woo investors in Singapore and Prime Minister visits the US between September 23 and 28.</div><div> </div><div>Stock markets across Asia excluding Japan, rose following the Fed decision to hold its rates. The BSE Sensex gained almost 500 points to 26,460. The rupee gained 54 paise to 65.92 per dollar, its highest level in three weeks, and the 10-year government bonds rose, pushing down yield to 7.72 per cent.</div><div> </div><div>So, what did the Fed do and why. The Fed by a clear margin of 9-1 decided to hold its funds rate at between zero and 0.25 per cent. Consistent with statutory mandate, the Fed said it seeks to foster maximum employment and price stability. US inflation rate is expected to inch up to its 2 per cent target.</div><div> </div><div>"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,'' it said. The Fed also cited global concerns about fragile global growth rate, slowdown in China and volatility in financial markets. Central bankers from across the globe, including Governor Rajan, as also IMF and World Bank chiefs, had appealed to the US Fed to take cognizance of the impact of its actions on global economy.</div><div> </div><div>An increase in Fed rate would have narrowed interest rate differential between India and the US. and theoretically could have sucked out billions of dollars from all emerging markets. In fact, since the beginning of the year global funds have pulled out money from emerging markets including India fearing Fed rate increase. Fund managers now expect the decision to slow outflows from India though India is unlikely to begin attracting inflows.</div><div> </div><div>Yet, India is lucky to have one of the steadiest economic fundamentals including slowing consumer inflation, Asia's best performing currency, narrow current account deficit and fiscal deficit under control, as also an economic growth that may not be galloping away but is not tottering either as in other similar sized economies.</div><div> </div><div>Still, India's growth is slower than desired as the government completes almost one and half year of its tenure and many of promises and aims remain unfulfilled. Conditions look ripe for the RBI to do its bit to make cost of borrowing cheaper, and once again focus on growth since inflation is under control.</div><div> </div><div>The Fed is expected to revisit its decision either on October 27, 28 Federal Open Market Committee meeting or surely at its December FOMC meeting. </div><div> </div><div>``In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation,'' the Fed said in its post-policy statement. ``When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent.''</div><div> </div><div>India can and should act quickly even though the uncertainty may probably have narrowed.</div>
