As the move is in line with expectations it is unlikely to impact Indian financial markets. Earlier in the day, rupee and government bond markets rallied despite expectations of a 25-basis point (100bps = 1 percentage point) hike as a rate increase has been factored in.
The rupee gained 34 paise to close at 76.27 — a two-week high against the dollar. The domestic unit had closed at 76.61 on Tuesday. The 10-year bond, which had closed at 6.82% on Tuesday, eased to 6.79%. Bond prices rise when yields fall.
Usually, a rate hike in the US causes the domestic currency to weaken and bond yields to rise as global funds shift to dollar fixed-income assets, which turn more attractive.
However, this time it is different. “A 25bps rate hike was already discounted by all the markets but a 50bps hike would have been a surprise,” said KN Dey of United Financial Consultants. “The thing to watch out for is if the commentary accompanying the rate hike is too hawkish. I see a possibility of the rupee firming up to below 76 levels in March itself as there are some signs of the end to hostilities. Crude oil prices have also corrected,” Dey added.
On Wednesday, the rupee gained as sentiment improved for emerging markets on hopes of peace talks in the Russia-Ukraine conflict and reports of Covid cases coming under control in Asia. However, markets continued to remain cautious ahead of the Fed meeting. The Fed rate hike is in response to rising US inflation and is also part of its moves to exit the extraordinary measures taken during the pandemic.
According to Madan Sabnavischief economist, Bank of Barodathe rupee has done relatively well during the period following the Russian invasion of Ukraine. During this period the dollar has appreciated 3.24% against the euro. “We may expect the rupee to remain in the range of Rs 76-77 till the end of March. The futures contracts on NSE which may be taken to be broadly indicative of expectations of the currency at a later date range between 76.48 for March-end contract to 77.18/$ for the end-June contract,” said Sabnavis. Another factor supporting the rupee is the fact that forex reserves stand at $631 billion, which is marginally below the February 18 balance of $632 billion.