US and India hike Interest Rates

The Rupee opened stronger on Thursday because the greenback fell to a one-week low globally after the US Federal Reserve raised its benchmark interest rate by 50 basis points but dismissed the idea that even larger hikes could lie ahead.

The US Federal Open Market Committee raised the federal funds rate target range by 50 basis points to 0.75-1.00%, in line with the market’s expectation. However, Fed Chair Jerome Powell said in a press conference following the Fed’s policy statement that the US central bank is not actively considering a 75 bps increase, but that additional 50 bps hikes should be on the table for the next couple of meetings.

Asian share indices rallied tracking gains on Wall Street following the FOMC outcome. This is expected to provide support to the Indian Rupee. Back home, private and foreign banks are expected to sell dollars for overseas investments into the initial public offering of Life Insurance Corp of India. This may provide support to the rupee. The premium on the one-year dollar/rupee forwards is expected to continue to rise after a 40 bps hike in the repo rate along with a cash reserve ratio hike of 50 bps at an off-cyclical policy meet by the Reserve Bank of India on Wednesday.

While a less hawkish policy stance by the US Fed also means the interest rate differential between India and US will not narrow as much as the market expects, it could lead to a rise in premiums. will keep an eye on the Bank of England’s rate decision due later today. The Bank of England is expected to lift rates by a 25 bps, which would be its fourth hike in a row to control surging inflation.

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