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RBI had factored a cut in the Fed rate
November 2, 2007: Finance Minister, P Chidambaram mentioned that the RBI had made out that there will be a cut in the benchmark interest rate by the US Federal Reserve.
It was an expected cut, bearing which the monetary policy was announced yet it was too early to assess the impact on capital inflows and currency.
The US Fed has announced a 0.25% cut in benchmark interest rate, which is expected to increase capital flow from Foreign Institutional Investors (FIIs) in the Indian stock market. The FIIs have pumped in more than $3 billion in Indian stocks after the US Fed reduced the discount rate, which is the interest rate at which banks borrow from the US Central Bank, by 0.5% on September 18, 2007.
The rupee has breached the Rs.40 mark against the dollar on September 20, 2007 on the back of increased inflows. The government and the central bank have taken various measures to moderate inflows as they are all worried about capital inflows and appreciation in the rupee vis-a-vis dollar.
SEBI had recently clamped down on issuance of participatory notes mainly to stem flows of anonymous foreign capital into the country’s stock markets.
Source: The Economic Times