Fed rate cut expected, factored in by RBI: FM

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New Delhi, Nov 1: The interest rate cut by the US Federal Reserve, a move that is expected to increase capital inflows into India, was factored in by the Reserve Bank of India (RBI) during its quarterly review of the monetary policy on October 30, finance minister P Chidambaram said on Thursday.

“This cut in interest rate by the US Fed was expected, and I think the Reserve Bank has already factored that while it announced the monetary policy,” Chidambaram said.

The US Federal Reserve announced a 0.25% cut in benchmark interest rate on Wednesday, which is expected to increase capital flow from foreign institutional investors (FIIs) in the Indian stock market. In order to contain liquidity, the RBI hiked the amount of cash banks required to deposit with it by 50 basis points, while it kept the key rates unchanged.

Asked about the impact of the US Fed rate cut on capital flows into the equities market, the finance minister said: “It is too early to say anything on this issue.” He added that it was too early to assess the impact of the US Fed rate cut on inflation and rupee appreciation.

FIIs have pumped in more than $3 billion in Indian stocks after Fed reduced discount rate —the interest rate at which banks borrow from the US central bank —by 0.5% on September 18.

The flood of dollar, which would expectedly be accentuated by the recent Fed rate cut, leads to major monetary policy consequences. The central bank absorbs the inflows and then releases rupee, which augments liquidity.