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The Reserve Bank of India is expecting the US Fed to hike its policy rate by up to 25 basis points and is prepared to meet any eventuality arising out of the decision, Governor, Raghuram Rajan said on Friday
An upward revision of rates by the Fed is being anticipated in the upcoming December 15-16 meeting.
According to Rajan, the markets have already factored in the possibility of a rate hike. “(There is) 70-75 per cent probability of Fed increasing rates. The Fed has prepared the way and is likely to go ahead. My guess is 25 basis points; probably one to 25 (basis points),” the Governor said in a press meet after the central board meet of the RBI here
An increase in Fed rates may lead to flight of capital from India, putting pressure on the foreign exchange (forex) market.
RBI Deputy Governor Urjit Patel said there will be “some changes in financial flows” across the world after the rate hike.
“What is important to analyse is the language used by the Fed when making this important monetary change. And, like other emerging markets and in the developed countries, one can expect that there will be some changes in financial flows taking place in the world…. One doesn’t expect from this direct policy interest rate change much of an effect that is not factored in by the market,” Patel said. To a question on liquidity, Governor Rajan said the RBI’s policy is to supply the markets with “plentiful” liquidity.
“Our policy has been to supply the market with plentiful liquidity. As and where we get the sense that long-term liquidity is needed, appropriately we will do a purchase of open market securities. All instruments are available to us.,” Rajan said.
The RBI had on December 3 announced that it would purchase ₹10,000-crore worth of bonds through open market operations (OMO).
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