FOMC Comment. Fed’s ‘hold’ action is advantage Indian equities and the rupee

The US Federal Reserve on Wednesday, kept its target fund rate range unchanged at 2.25 per cent to 2.5 per cent, as widely expected. But the actual surprise came from the forecast for the future rate hikes.

In December, the Fed had projected the median fund rates to stand at 2.9 per cent in 2019. The rates then were also at the same level as of now 2.25-2.5 per cent (median rate of 2.4 per cent). So, this had left the possibility of the Fed increasing the rates twice in 2019. But on Wednesday, the Fed moved the median rate forecast lower for 2019 to 2.4 per cent, which means that this year will not see any rate hikes from the US.

Slow down woes

Fear of an economic slow down has been the major factor which has made the Fed change its stance on its future rate hikes. In its policy statement, the Fed had indicated that the growth in the US has slowed down and also acknowledged that the country may not grow as strong as it had last year. It has also raised concerns on slow down in major global economies like the Europe and China. Additionally, the Fed indicated that uncertainty on the Brexit issue and the trade negotiations between the US and China may pose a threat to the global growth outlook.

Fed joins the club

The above-mentioned concerns have made the Fed revise the growth outlook lower for the US. The Fed expects the US to grow at a rate of 2.1 per cent in 2019, down from its December forecast for a growth of 2.3 per cent. With this lower revision in growth, the Fed now joins the other global major central banks like the European Central Bank (ECB) and the Bank of England (BoE) which had also revised their respective region’s growth forecast lower.

The ECB had slashed the growth prospects of the Euro Zone twice recently from 1.9 per cent to 1.7 per cent in December and then more drastically to 1.1 per cent earlier in March. Similarly, the BoE expects the UK to grow at a much slower rate of 1.2 per cent in 2019, down from its earlier projection of 1.7 per cent.

Boost for Indian equities

A pause in Fed rate hikes for the rest of the year is a positive for risky assets. Gold has risen breaking above the key level of $1,310 per ounce and is currently trading at 1,318 per ounce.

The US dollar index (96) has declined sharply and is hovering around the crucial 96-95.85 support zone. A break below 95.85 can drag the index lower to 95 in the coming days. This in turn can limit the downside in rupee and continue to keep the currency strong against the dollar in the short term.

This is good for equity market as FPI flows can increase if rupee strengthens further. Both the Sensex (38,386) and the Nifty 50 (11,521) are likely to revisit their record highs of 38,989 and 11,760 in the coming weeks.

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