Rajan: Fed kept rates on hold due to global growth concerns

Rajan: Fed kept rates on hold due to global growth concerns

FPJ BureauUpdated: Friday, May 31, 2019, 10:25 PM IST
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Federal Reserve Chair Janet Yellen speaks at the Federal Reserve's Wilson Conference Center September 17, 2015 in Washington, DC. The Federal Reserve held its key interest rate locked at zero Thursday, pointing to the downturn in the global economy even as US growth remains steady. But members of the policy-making Federal Open Market Committee made clear, in projections accompanying their announcement Thursday, that they still expect rates to rise by the end of the year. AFP PHOTO/BRENDAN SMIALOWSKI |

World’s most powerful central bank again postpones its decision to raise rates from 0.00-.025% till year-end, giving a big relief to India and other emerging nations

MUMBAI : Uncertainty over global economic growth, including that in the US, could have been a key factor behind the US Federal Reserve’s decision to keep interest rates unchanged, Reserve Bank of India Governor Raghuram Rajan said.

“If we look around the world today, it doesn’t present a pretty picture,” Rajan said at the C.K. Prahlad memorial lecture.

“Industrial countries are still struggling with few exceptions to grow and uncertainty about growth in United States as well the world is probably what impelled the Fed to stay on hold yesterday.”

In what could be termed as the most-awaited Fed meeting since the 2008 global credit crisis, the world’s most powerful central bank again postponed its intended decision to increase the rates from 0.00-.025 per cent till the end of the year, giving a big relief to India and other developing countries.

“Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the US central bank’s monetary policy committee, the Federal Open Market Committee, said, acknowledging the turmoil that global markets have been embroiled in following months of poor economic data from China that has forced the world’s second largest economy to devalue its currency and support stock markets to prevent panic.

On Aug 11, the People’s Bank of China devalued the yuan by 1.9% after months of capital outflows had forced the Chinese central bank to defend the currency.

In August, China’s foreign exchange reserves declined by a record $94 bln.

Federal Reserve Chairwoman Janet L Yellen said the committee continues to anticipate that the first increase in the federal funds rate in nearly a decade will be appropriate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

Rajan said the Fed’s decision reflected the US central bank’s desire to await more information before “taking a final view”. Speaking about the reaction of financial markets to the Fed’s decision to maintain status quo on rates, Rajan said that so far, markets had reacted calmly.

“Clearly, thus far the markets seem to have reacted somewhat benignly…” Rajan said on the sidelines of the lecture.

“What we’ll have to do is continue what we’ve been doing which was anyways the intention regardless of the Fed decision.” The market anticipates that Rajan will cut rates at the September 29 meeting.

Terming no change in interest rate by the US Federal Reserve as “non-event”, NITI Aayog Vice Chairman Arvind Panagariya said that whenever the hikes begin, there will be a gradual rise.

Economic Affairs Secretary Shaktikanta Das said the US Federal Reserve’s decision to keep interest rates unchanged for now boded well for the emerging economies, and reiterated that India would continue focussing on reforms and macroeconomic stability.

According to global financial services majors like Bank of America Merrill Lynch (BofA-ML) and DBS, receding external risks pave the way for the Reserve Bank to cut the repo rate on September 29. Domestic developments are favourable as well. “We expect RBI Governor Rajan to cut 25 bps on September 29 and another 25 bps in February. After all, CPI inflation is well set on the RBI’s under-6 per cent mandate,” BofA-ML said in a note.

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