US Fed holds rates, but hike likely in Jun

MUMBAI: The US Federal Reserve on Wednesday kept interest rate unchanged as expected, but a series of upcoming Fed rate hikes could drive up the dollar and prompt foreign investors to withdraw money from Indian markets, brokerages said.

At a two-day meet of its ratesetting panel headed by chairman Jerome Powell, the US Fed kept its benchmark overnight lending rate in a target range of 1.50-1.75%. However, the rise in the US inflation indicates the central bank will raise the rate at its next meeting on June 12-13 as expected.

The Fed raised rates in March and has forecast another two increases this year, although an increasing number of policymakers expect it could be three. Investors expect a rate hike at the June policy meeting. Powell has maintained that the central bank will pursue a middle-of-the-road approach to monetary policy, continuing to gradually lift rates in the face of a robust economy that is yet to spark a jump in inflation.

According to Kotak Securities Ltd, the rise in US yields and the hike in interest rates can push the dollar further higher, triggering selling by foreign institutional investors (FIIs). It said in a May 2 report that US Treasury yields moved above 3% in April on the prospects of higher US real gross domestic product (GDP) growth, expected Fed interest rate hikes and higher US inflation.

“From an Indian standpoint, there could be an impact on our forex reserves and currency as declining interest rate differential between Indian and US debt could trigger outflows from Indian debt market instruments,” the brokerage said.

FIIs were net sellers of Indian equities in April while domestic institutional investors (DII) continued to buy. The Sensex is up 3.07% in the year so far after a sharp correction due to heavy selling that started at the end of January. Hopes of a revival in earnings growth, following disruptions caused by demonetisation and the implementation of GST in July last year, have returned.

In April, FIIs were net sellers of Indian shares worth $943.32 million. They pulled out $1,957.75 million from Indian equities in February before buying $2,027.52 million worth of shares in March. In contrast, DIIs have been actively buying. They have bought shares worth ₹17,813.01 crore, ₹6,693.91 crore and ₹8,511.33 crore in February, March and April respectively.

Bloomberg contributed to this story.