Here’s how Fed’s move to keep rates unchanged will impact India

Mumbai: The Federal Reserve (Fed) left its key benchmark rate unchanged on Thursday, despite renewed calls by President Donald Trump to cut interest rates. It was decided to keep the Federal Funds rate between 2.25% and 2.5%.

The Fed unanimously agreed to leave rates alone, sticking with the wait-and-watch approach outlined earlier this year amid uncertainty about where the US economy is headed. The Chairman remarked that the Fed did not see a strong case for rates moving in either direction and was comfortable with the current policy stance.

Key takeaways from the Fed policy announcement are as below:

1. Fears of a slowdown in the wake of positive news from China and trade tensions between Washington and Beijing appear to be easing.
2. Global cross-currents which were apparent at the start of the year have moderated including the extension of Brexit negotiations between the United Kingdom and the European Union.
3. On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2%.
4. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
5. There has however been a slowdown in household spending and business investment in the first quarter.

 Let us look at the implications for India:

1. No change in interest rates at present and possible rate cuts if inflation remains weak in the USA can be a positive for FPI flows to the emerging markets including India. This will help to boost our capital account and counter the higher CAD due to higher oil prices.
2. Slower growth in the USA would, however, have a negative impact on India’s exports as a slowing economy can impact global trade flows and Indian exports are driven more by demand forces than the price for most products.
3. The dollar is expected to remain stable and not likely to appreciate too much which is good for the Rupee which is under pressure presently due to the oil worries.
4. RBI policy unlikely to be influenced overtly as the Monetary Policy Committee (MPC) looks more at the CPI inflation number and the US action is more a secondary concern.

Note: Care Rating’s Economics division released a report ‘Federal Reserve Action and Impact on India’ on 2^nd May. The above article is based on the write up from the said report.