US rate rise: Markets expect to absorb Fed action

A possible rise in rates approved by the US Federal Reserve this week is not expected to majorly disrupt the markets.

Its Federal Open Market Committee has a two-day meet scheduled. The currency and bond markets are already factoring in the likelihood of a rate rise.

Reserve Bank of India (RBI) Governor Raghuram Rajan had said on many occasions that India is better prepared for a US tightening.

“The market has already factored in a 25 basis points rise by the Fed. Some other uncertainties have also already got priced in. The Fed’s guidance would be key for further moves. I don’t expect any disruption in the debt markets,” said Manish Wadhawan, head for interest rates at HSBC India.

The meeting is on Wednesday and Thursday. The Fed has held rates near zero since late 2008.

The currency market believes the rupee might not see much volatility even if the Fed begins raising the rates. “The rupee will move in line with other currencies. The rupee is still overvalued in Real Effective Exchange Rate terms. Barring further negative news from China or continued negative emerging market sentiments, impact of Fed’s action on the rupee might be limited beyond the initial knee-jerk reaction,” said Badri Nivas, head, local market treasury, Citi India.

The recent weakness of the rupee against the dollar has been due to China’s devaluation of the yuan. Though RBI holds comfortable levels of foreign exchange (forex) reserves, concerns remain on the China front.

On Friday, the rupee ended at 66.54, compared to the previous close of 66.43 a dollar. The rupee had ended at 63.04 on December 31, 2014. Since the start of this calendar year, it has weakened by 5.6 per cent.

“If the Fed goes for a rate hike, it will be a relief for Indian market. After a week or so, there will be stability in global markets. Once stability returns, RBI might decide to go for a rate cut later this month. The rupee might trade in the range of 66.30 to 66.70 this week,” said N S Venkatesh, executive director and head of treasury at IDBI Bank.