A rate hike by the US Fed is imminent, but it is unlikely to be disruptive for global financial markets, says India Ratings and Research (Ind-Ra). The Fed’s calibration of language will give global investors enough lead time to align their portfolios for fully internalising the possibility of a rate hike in December 2015.
Over the last couple of months, policy makers across the world have expressly supported growth; and economic activity appears to be stabilising though at lower levels. Against this backdrop, the Fed's intent to hike rates in the near term inspires more confidence in US recovery prospects.
The Fed has kept the door open for a potential rate hike in December policy as it has (1) downgraded its concerns on global economic and financial developments and (2) expressed confidence about the pace of recovery in the US economy – particularly a revival in consumption and investment along with housing sector recovery.
The Fed has also exhibited confidence that the inflation rate would inch towards its 2% medium-term objective.
Globally, financial markets may read the Fed's policy communication as the one that provides further directional clarity over the stage of economic recovery in the US.
At the same time, the extent and pace of policy tightening would hinge on (1) firming up of growth momentum in the US and (2) global growth outlook and its effect on other major decisions of the central banks of Europe, Japan and China.
Having said that, enhanced clarity on US rates’ trajectory will lead to smooth and gradual market adjustment ahead of the December policy. To that effect, the impact on currency and bond market will be minimal at best. As a high-yielding and stable asset in the emerging market space, rupee will stand to outperform its peers in the coming few months.
The bond market, on the other hand, may continue trading within a range with domestic liquidity and demand-supply dynamics having a large bearing on the near term trajectory.