US Fed holds rates; Indian markets likely to cheer move

Fed's benchmark rate has been held near zero since the depths of the financial crisis in December 2008

The US Federal Reserve on Thursday kept interest rates unchanged at zero, in a nod to concerns over a weak world economy, but left open the possibility of a modest policy tightening later this year.

In what amounted to a tactical retreat, the US central bank said an array of global risks and other factors had convinced it to delay what would have been the first rate increase since 2006.

After the US central bank’s decision, US Federal Reserve Chair Janet Yellen said: “Outlook in China, other emerging economies have become more uncertain now... the pace of rate rises will be gradual.”

The Indian markets are likely to cheer the decision. The BSE benchmark Sensex could open higher on Friday, but the gains could be capped as stock markets had largely priced in the status quo.

Equity markets had assigned only a 32 per cent probability for an interest rate rise. Most Asian markets had on Thursday closed higher, anticipating the Fed would hold rates. The Indian market, which remained closed on account of a public holiday, had gained about one per cent on Wednesday.

Following the Fed announcement, the US markets fell marginally. The Dow Jones Industrial Average was down 0.12 per cent from previous close at 1 am (IST). The Singapore Nifty, though, was up 56 points at 7,997.

Market players believe the US Fed will wait until December to raise rates. Interest rates in the US have been near zero since the 2008 global financial crisis. Edelweiss Securities President & Chief Executive Officer Vikas Khemani said: “While the move is positive from a short-term perspective, it has still kept the uncertainty alive till the US Fed’s next policy decision. The Fed said if it sees an improvement in labour market, it might raise rates. So, to an extent, the uncertainty has come back. Had it raised the rates, the event would have been behind us.”

ICICI Prudential Mutual Fund MD & CEO Nimesh Shah said: “The decision to delay rate rise is a positive for India. Indian equities continue to be good long-term bets despite emerging market redemptions.”

Regarding Friday’s opening, Khemani said: “Indian markets should be mildly positive, with a gain of 0.5 to one per cent, but I don’t see any major gap-up opening. For now, we are back to our local issues. Overall, nothing much has happened. Now, markets will look at what RBI will do.”

ASK Investment Managers business head & CIO Prateek Agrawal said: “The expectations had dropped before the event itself. To an extent, it (Fed not raising rates) was already factored in, so we saw a rally in money markets across the world on Wednesday itself.”

“Had the Fed raised rates, it would have tilted the balance of money flow in the US’ favour. That means any country whose current account is not balanced would have seen pressure. Today, India’s is well-balanced and better placed than many countries.”

The benchmark indices — Sensex and the National Stock Exchange’s Nifty — have rebounded over four per cent from their 15-month lows, touched earlier this month.