In the last policy statement, Fed had said: “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy.” Officials said that it was going to be a case of ‘burning midnight oil’ for them, as the entire safeguard mechanism would need to be reworked post the Federal Reserve’s highly-awaited decision.
However, they anticipate a sharp volatility in any case, with anticipation that a stance towards higher interest rates in the US would make the US dollar stronger and trigger a large-scale capital outflows from markets like India. In the case of the Fed continuing with its loose monetary policy stance, the markets can still see a huge volatility with an upward bias. “We will have to wait till late tonight… Derivative open interest is being scrutinised for any additional stress and margin adequacy,” a top official said. RBI Governor Raghuram Rajan also discussed the Fed issue with Finance Minister Arun Jaitley on Wednesday and said that the central bank was fully prepared to deal with any volatility.
On Tuesday, IMF chief Christine Lagarde had also warned of high market volatility and capital outflows if the US Fed hikes rates and asked India and other emerging markets to be prepared for such an eventuality.
Warning of a possible repeat of the high market volatility and indiscriminate capital outflows when the US hikes its rates, she said a portfolio rebalancing out of emerging economies is possible and that may lead to market volatility. The last time the US hiked rates was in 2006 during Alan Greenspan time who had brought to record lows. Admitting that the easy money policy of the West since the 2007-08 credit crisis has helped the emerging world, the IMF chief said such policies also led to a build-up of risks in this part of the world.
Stock markets have been already seeing sharp bouts of volatility for the last few days.