Expecting a 25 bps hike in the US Fed rate post-September 17 meeting, American brokerage Bank of America-Merril Lynch today said delayed Fed action will only harm India as a postponement will stall portfolio inflows and prolong volatility.
Stating that the country would “emerge as a relative value given the higher GDP growth” here, BofA-ML in a report today said, “Portfolio flows could resume in equities due to risk diversification out of China’s volatile equity markets and in bonds following the junking of Brazil by S&P, provided the RBI hikes the G-Sec limits for foreign funds.”
The US central bank is widely expected to hike its historically low interest rates either at its next week meeting or in December.
Following the 2008 global credit crisis, the Fed brought down its repo rates to a low 0.25 per cent to help improve the world’s largest economy come out of the recession and high unemployment.
Following the Chinese crisis, there have been views that Fed chairperson Janet Yellen may push back repo rate hike to December.
The report also said the “best case scenario for India is a 0.25 per cent Fed rate hike. While there could be a kneejerk sell off across EMs, India would likely emerge as relative value, given relatively higher growth.”
But the report warned that the worst is if the Fed delays action to October or December as more the delay higher will be volatility which will lead the foreign funds to keep of emerging markets, including India.
“A delayed Fed action will stall capital inflows till the Winter, given the uncertainty about the turnaround in earnings and the Bihar poll results on November 8. With the RBI likely to await forex inflows and OMO purchases only in 1Q, this would likely tighten liquidity at a time credit offtake is already running at a low 9.5 per cent,” it said.
On its expectations from the September 29 RBI policy meeting, the report said it expects a 25 bps cut and warned that “an unlikely RBI push back to early 2016 may not be as positive for risk on as some think as growth fears could overwhelm comfort about lower rates”.
The report also said it expects the RBI to increase the foreign holding in government securities to by USD 5-6 billion from the existing levels as G-secs are already oversold by any macro parameters.