US Federal Reserve policy expectations
How are the Indian and global economic environments affecting the financial markets?
US central bank – the Federal Reserve – has responded to the changing market conditions through speeches by senior Fed officials including the Fed chairman. The fear that gripped the markets about possible acceleration or overshooting of US interest rates beyond the neutral Federal Funds rate amidst worries about global growth due to the trade war between the US and China has subsided after Fed statements that implied that future rate hikes could be at a slower pace through 2020. The Fed thinks that the current interest rate is just below neutral which neither encourges or discourages growth with inflation at target. It is possible that there may not be too many hikes left before the Fed halts its rake hike cycle. Also, to consider is the reduction of the Fed’s balance sheet by selling government bonds and mortgage securities which could raise bond yields and mortgage rates. That said, the Fed’s outlook on rates with any revisions to be published after its December meeting is good for emerging markets such as India: slower pace of rise in US interest rates makes India attractive for foreign institutional investment (FII) and could reduce the amount of dollars FIIs repatriate from India. This will ease the pressure on the rupee especially given the falling oil price.
What to expect from the markets next week?
Indian financial markets could breathe a sigh of relief because of expected slower pace of Fed rate increases and, therefore, the bias could be to the upside. The markets could have more direction in December after (1) the meeting of the Organization of the Petroleum Exporting Countries (OPEC), (2) Reserve Bank of India’s (RBI) bi-monthly monetary policy committee (MPC) meeting and possible change in RBI policies to address financial sector issues, and (3) FOMC meeting about US interest rates and get away from range-bound, flat, and drifting behaviors of the past couple of weeks.