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| Fed move not to hit Indian capital outflows Fri, 19 Feb 2010 06:35:35 GMT |
| The Economic Times Fed move not to hit Indian capital outflows 19 Feb 2010, 1205 hrs IST, REUTERS PATNA: Capital outflows from India won't be hit after the U.S. Federal Reserve's decision to raise the discount rates, a central bank official Capital What is IIP? Know what is monetary policy India's road to economic reform India a safe bet said on Friday. "I don't see any major impact on capital outflows. We have tightened (policy), they have also tightened," said a senior official at Reserve Bank of India who did not wish to be identified. "The capital account is partially convertible so capital flows are subject to sentiment." he added. The US Federal Reserve on Thursday made its first interest rate move since December 2008, hiking an emergency lending rate it charges banks, but insisted borrowing costs would not rise for consumers or companies. The Fed cast its decision to raise the discount rate to 0.75 percent from 0.5 percent as a response to improved financial market conditions that warrant less of a helping hand from the U.S. central bank. It went to pains to draw a distinction between the discount rate and the federal funds interbank lending rate, its main monetary policy tool, which remains unchanged near zero percent to help sustain a fragile U.S. economic recovery. "Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities," the Fed said in a statement. Also Read → India gets ready to confront EU on ‘impending’ carbon tax → Rate hike may be a case of too much too soon → Food prices burn a big hole → Universal PDS only way to beat hunger, tackle inflation? "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," it said. The decision, requested by all 12 regional Fed banks and approved unanimously by the central bank's board in Washington, takes effect on Friday. Despite the Fed's effort to distinguish its programs to foster market liquidity from monetary policy, financial markets viewed the announcement as presaging an eventual policy shift. U.S. stock futures dropped sharply and government bond prices fell after the announcement, with the yield on policy-sensitive two-year notes touching their highest level since late January. The U.S. dollar also rose, hitting a nine-month high against the euro and a one-month high against the yen. Interest rate futures markets moved to price in about a 70 percent chance of a hike in the Fed's main policy rate, the federal funds rate, by late September, up from 54 percent. Although Fed Chairman Ben Bernanke said last week the central bank could soon raise the discount rate it charges on short-term loans to banks, the timing came as a surprise. The Fed usually moves the emergency loan rate in tandem with the overnight federal funds rate. "The Fed can talk all day about how the discount rate hike is technical and not a policy move, but the market sees it as a shot across the bow," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. Share |
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