Fed rate hike delay may hit India’s forex inflows

Expecting a 0.25 percentage point hike in US interest rate post the September 17 meeting of the Federal Reserve, US brokerage Bank of America-Merril Lynch on Friday said delayed Fed action will stall portfolio inflows and prolong volatility.

Stating that the country would “emerge as a relative value given the higher GDP growth”, B of AML said in the report: “Portfolio flows could resume in equities due to risk diversification out of China’s volatile equity markets and in bonds following the junking of Brazil by S&P, provided the RBI hikes the G-Sec limits for foreign funds.”

The US central bank is widely expected to hike its historically low interest rates either at its next week meeting or in December.

Following the 2008 global credit crisis, the Fed brought down its repo rates to a low 0.25 percentage point to help the world’s-largest economy come out of recession and high unemployment.

Following the Chinese crisis, there have been views that Fed chairperson Janet Yellen may push back rate hike to December.

The “best case scenario for India is a 0.25 percentage point Fed rate hike. While there could be a sell-off across emerging markets, India would likely emerge as relative value, given its relatively higher growth,” the report said

On its expectations from the RBI policy review on September 29, the report said it expects a 0.25 percentage point cut and warned that “an unlikely RBI push back to early 2016 may not be as positive for risk on as some think as growth fears could overwhelm comfort about lower rates.”