Fed relief

Indian markets have predictably reacted positively to the US Federal Reserve’s decision not to hike its benchmark overnight interest rate, with the Sensex rising 255 points and the rupee strengthening by over 75 paise on Friday. The Fed has cited(mentioned,उल्लेख) “recent global economic and financial developments” (read Chinese slowdown) as the main reason for keeping its target rate at the near-zero levels prevailing(common,प्रचलित) since December 2008. Although the current US unemployment rate, at 5.1 per cent, is the lowest it has been in almost seven and a half years, its annual inflation of 0.2 per cent is well below the Fed’s medium-term target of 2 per cent. The central bank not only expects a slowing world economy to put “further downward pressure on inflation in the near term”, but foresees(estimate,अनुमान) inflation even over the “medium term” to rise only “gradually” towards 2 per cent. Even in that event, economic conditions may still, “for some time”, warrant keeping the target interest rate “below levels views as normal in the long run”. There couldn’t be any more dovishness(peaceful,शांतिवादी) in monetary policy language than that.

What is clear from all this is that a Fed rate hike, even if it happens later this year, will be small. To that extent, the risks of capital outflows from emerging economies with relatively better macro fundamentals, such as India, stand significantly reduced. Foreign institutional investors (FIIs) have, since the start of August, withdrawn over $3.3 billion from Indian equity and debt markets. The latest Fed decision should, hopefully, stem further outflows — at least till the next open market committee meeting. True, FIIs selling has also had to do with concerns over the Chinese slowdown, exacerbated(worsen,बिगाड़ना) by last month’s yuan devaluation and seen to impact emerging economies in general. But this is the moment for Indian policymakers to seize. FIIs and other overseas investors should be convinced that India, unlike other emerging economies, is a beneficiary on the whole from low global commodity prices. Also, it offers better prospects for growth alongside macroeconomic stability, making the country a compelling(forceful,बाध्य) investment destination.

The Fed’s decision should also embolden(cheer,प्रोत्साहन) the RBI to go in for a sharp repo rate cut of at least 50 basis points at the earliest. That wholesale inflation has been in negative territory for 10 straight months, consumer price inflation is below 3.7 per cent and, now, the US Fed hasn’t cut rates, strengthens the case for substantial monetary loosening at this stage. The country needs revival of growth and investment today, which is, moreover, the only way to attract capital flows in a challenging global environment. And that requires sentiment to revive, for which mere 25-basis point rate cuts will not do