US Fed flags rate hike, will India catch the flu?
CAPITAL FLIGHT Janet Yellen says rates to be reviewed on ‘meeting-by-meeting basis’; spotlight on emerging markets
WASHINGTON: US Federal Reserve chief Janet Yellen on Tuesday signalled a shift towards raising interest rate saying the employment situation has improved and spending and production was on the rise.
“The employment situation in the US has been improving on many dimensions,” Yellen said while deposing before the Senate Banking Committee on Tuesday.
“If economic conditions continue to improve, as the committee anticipates, it will at some point begin considering an increase in the target range for the federal funds rate on a meeting-bymeeting basis,” she added. “Before then, the committee will change its forward guidance. However, it is important to emphasise that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.”
A rate hike in the US is likely to prompt foreign funds to move out money from emerging markets such as India to those closer home in the US in anticipation of better returns.
RBI will be keeping a close watch on interest rate movements in the US as sustained dollar flight from India could hurt the rupee. The rupee has recovered smartly from a record low of 68.85 to a dollar hit on August 28, 2013 to about 62 to a dollar currently.
In a testimony, which advanced the Fed’s “slow-motion” retreat from a low-rate regime as The New York Times put it, Yellen indicated the next step could mean an announcement in March.
If the economy continues to improve, she added, the Fed “will An interest rate hike in the US is likely to reduce global liquidity flow into emerging markets including India
It is also likely to weaken the rupee against the dollar
This may make imports costlier
The rupee went into an tailspin the last time the US
at some point begin considering an increase in the target range for the federal funds rate”.
The US central bank had in December announced interest rates will remain where they have been since 2008, near zero, but indicated a hike may come around the middle of 2015.
“The committee considers it unlikely to begin the normalisation process for at least the next couple of meetings (the next is in January and then in March),” Yellen had said then.“This assessment, of course, is completely data-dependent.” Federal Reserve signalled a tapering of its quantitative easing programme
But India is better placed now than it was 2-3 years ago to tackle the volatility in the rupee, as inflation rate has been falling and foreign exchange reserves are at a record high
Projections released by the bank officials indicated a hike could come around the middle of 2015.
Analysts said the testimony did little to nail down the likely date of a rate hike. “I would suggest that Yellen is still keeping a very open mind, still in no hurry to give a signal that a rate hike is imminent,” said Brian Dolan, head, market strategist at New Jersey-based Drivewealth LLC.
World stocks showed mixed reactions as markets reacted cautiously to Yellen’s comments.
(WITH AGENCY INPUTS) >> ‘RBI MAY CUT RATES’: P21