Raghuram Rajan gets more headroom to do away with rupee restrictions as Fed stimulus stays

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Fed's decision gives RBI Governor Raghuram Rajan much more headroom to move in favour of doing away with some of the short-term restrictions on capital outflows. Fed's decision gives RBI Governor Raghuram Rajan much more headroom to move in favour of doing away with some of the short-term restrictions on capital outflows.
SummaryIndian markets are predicted to rally on Fed's decision against trimming its bond purchases.

The US Federal Reserve’s move to keep the economic stimulus programme unchanged could come through as a shot in the arm for most emerging market economies, including India.

The Indian markets on Thursday are predicted to rally on the US Fed’s decision against trimming its bond purchases. The decision — first tentative step by the central bank to wean the world off its stimulus programme that has helped prop up the US economy and equity markets across the globe for much of the year — is also expected to determine interest rates in India, especially since the Reserve Bank of India postponed its monetary policy review from September 18 to September 20, primarily to see what the Fed does.

The Fed’s decision essentially gives RBI Governor Raghuram Rajan much more headroom to move in favour of doing away with some of the short-term restrictions on capital outflows placed by his predecessor in August to prop up the rupee.

A reversal of capital inflows had the potential to hit the rupee as financing the current account deficit, which was 4.8 per cent of GDP in 2012-13, would have had became difficult. CAD is likely to be $70 billion in 2013. In light of the Fed move, the rupee should gain further as the worries about foreign fund outflows are expected to recede. Inflation worries notwithstanding, the Fed move also offers Rajan a freer hand in the issue of monetary easing.

The Indian bourses had essentially priced in a $10-$15 billion cut in the US stimulus and there were fears that a larger cut may lead to a sharp fall in equities on concerns that foreign investors will take money out of the country. India witnessed net capital inflows totaling $88 billion in 2012, largely due to global quantitative easing, according to global brokerage Nomura.

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