With US Fed seen holding rates steady, ECBs to gain traction, FPI flows to continue

Our Bureau Mumbai | Updated on September 26, 2019

Lower interest rates in the US, in the backdrop of the Federal Reserve keeping its rates unchanged and indicating that there will be no rate hikes this year, would be useful for external commercial borrowings (ECBs), where companies can continue to leverage the market under a stable forex currency regime, according to CARE Ratings.

"This (ECB) window can be used more by Indian companies, depending on the interest rate spread between foreign and Indian markets. As interest rates in India are poised downwards, the overall cost of funding may be expected to go down," said Madan Sabnavis, Chief Economist, CARE Ratings.

He elaborated that an unchanged stance (of the US Fed) as of now, with the possibility of a rate cut, means that the dollar would no longer be strengthening against other currencies. This is positive news for the rupee, which would appreciate on this score.

"However a lot (how the rupee moves vis-a-vis the US Dollar) depends on how other factors turn out, such as the current account deficit and capital flows. Movement in oil prices would hold the clue here.

"Therefore, rupee appreciation cannot be taken for granted, even as the normal pace of depreciation of 3.5-4 per cent this year would reduce. Further, the swap of dollars by the RBI from banks to inject liquidity will, in a limited manner, also restrain appreciation of the rupee," said Sabnavis.

Good for FPI flows

The credit rating agency, in a note, said an unchanged interest rate regime in the US is good news for FPI (foreign portfolio investor) flows, especially in debt, and the present wave of positive inflows would continue for some more time. A weak and volatile rupee tending towards depreciation and higher rates in the US had kept FPI flows negative last year, which could get reversed.

Foreign direct investment is unlikely to be influenced by the latest US Fed decision, as it is driven by other factors such as policy framework and political stability.

Sabnavis said monetary policy action in India is unlikely to be influenced overtly by the US Fed's decision, as the target is inflation and while the external sector and the state of the rupee are factors that are considered when drafting the statement, the decision is driven by inflation and, hence, should not have an impact.

Published on March 22, 2019

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