The US dollar held at a two-week high on Wednesday as global markets waited for the Federal Reserve’s latest policy decision. The dollar index rose 0.3 per cent on Tuesday to 102.40, its highest level since 14 October, reflecting a cautious mood among traders ahead of the announcement. With interest rates in the world’s largest economy at stake, even a decision to do nothing can move currencies, bond yields and stock markets around the world, including in India.
The market’s central expectation is clear. Fed funds futures are pricing a 91 per cent probability that the Federal Open Market Committee keeps its policy rate on hold, according to CME FedWatch. That does not mean the meeting is a non-event. Traders will be listening closely for any signal about a possible move in December, since the guidance the Fed gives about its future path often matters as much as the decision itself. As Chris Weston of Pepperstone put it: “The Fed doesn’t need to hike today to move markets. It simply needs to change the perceived probability of hiking in December.”
Currency markets were steady ahead of the decision. The euro was flat at 1.1129 dollars, while the pound traded at 1.3307 dollars. The dollar was 0.1 per cent weaker against the yen at 157.81. The New Zealand dollar stood at 0.5682 dollars ahead of the Reserve Bank of New Zealand’s own decision, where economists generally expect a rate hike. The Australian dollar was 0.3 per cent stronger at 0.7047 dollars after third-quarter inflation came in at 1.3 per cent, up from 0.6 per cent in the previous quarter. Trimmed mean core inflation was 1 per cent, with the annualised rate running above target at 3.6 per cent.
Bond markets were equally calm. The US 10-year Treasury yield was unchanged at 4.9967 per cent, suggesting that investors are waiting for the Fed’s message before repositioning.
So what does all this mean for India? The connection runs through the rupee, foreign investment and the Reserve Bank of India’s own room to move. When US interest rates stay high, or when markets expect them to rise further, American assets tend to look more attractive to global investors. That can pull money out of emerging markets like India, putting pressure on the rupee and on Indian stock and bond markets. Foreign institutional investors, who move large sums in and out of Indian equities, watch the Fed closely for exactly this reason.
A decision to hold rates steady, accompanied by a calm message about the future, would generally be the gentler outcome for India. It would leave the interest-rate gap between India and the United States roughly where it is, reducing the incentive for money to flow out in search of higher American returns. A hawkish signal, by contrast, meaning language that suggests higher rates for longer or a greater chance of a December increase, could strengthen the dollar further, weigh on the rupee and tighten financial conditions in India. That does not automatically force the Reserve Bank of India to act, since India’s central bank sets policy based on domestic inflation and growth, but it does narrow the space in which it operates.
For now, markets have placed their bet: no change today, with all eyes on what the Fed says about December.
