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What Does Fed Reserve's Rate Pause Mean For Indian Equities?

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After its March meeting, USA's Federal Reserve on Wednesday said that it will leave its key interest rates unchanged. It also said that it is projecting no rate hikes for 2019. Further, the American central bank forecasts the US economic growth at 2.1 percent this year, down from the previous projection of 2.3 percent.

"We foresee some weakening, but we don't see a recession," said Federal Reserve's Chairman Jerome Powell at a press conference following the meeting.

What Does Fed Reserve's Rate Pause Mean For Indian Equities?
 

Back in November 2018 when Powell said that the policy rate is below the neutral rate that is the rate that neither stimulates nor restrains economic growth by a change in interest rate policy, it was widely predicted that there would an increase in inflows in favour of emerging markets.

This time around, the fed has not just paused the rate hike, but also signaled a halt in the unwinding of its balance sheet later this year. Unwinding a balance sheet at a central bank means selling securities to reduce money supply in the market. A pause on this would mean the liquidity will remain at a comfortable level.

China too has been increasing its liquidity while the European Central Bank signaled that it will not raise its exceeding low policy rate this year. India's RBI has changed its stance from 'calibrated tightening' to 'neutral' and cut interest rates.

This shows that almost all the major central banks have reversed monetary policy which could not only mean that the liquidity levels will remain elevated but that the policy rates could remain low for a long time.

The lower domestic growth expectation in the European Zone, China and now the USA has traders shift their attention to Emerging Markets like India, where a relatively moderate growth is expected.

However, investors will have to look out for the developments in US-China trade talks and Brexit, both scheduled to be decided by the end of this month. If any of these factors turn out worse than expected, it could interrupt the recent inflow of capital seen in the equity markets.

Read more about: equity
Story first published: Thursday, March 21, 2019, 13:39 [IST]
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