US Fed hike not to put pressure on local rates

The 16th consecutive interest rate hike by US Federal Reserve is unlikely to put pressure on domestic interest rates, a senior finance ministry official said Thursday.

Wednesday, the Federal Reserve raised its target Fed funds rate by quarter percentage point to 5.00 per cent.

Fed had started raising interest rates from a 40-year low of 1 per cent in 2004.

"I do not see the Fed rate hike putting pressure on interest rates here," the official told reporters. "Our economy is still largely insulated from interest rate movements in the US."

The hike means that the interest rate differential between India and the US is now down to 50 basis points.

The reduced interest rate differential, though, is unlikely to impact capital flows into the Indian stock market as sentiment remains bullish with hopes of a far superior return here and foreign investors' greater appetite for risk.

While gilts prices did not react to the Fed decision to up rates, they fell on fears of a hike in retail fuel prices and after Reserve Bank of India chairman Y V Reddy's comments overseas that inflation in 2006 may rise to 5 per cent.

The central bank has projected a 5.0-5.5 per cent inflation target for 2006-07 (April-March). India's headline inflation rate for the week ended April 22 was 3.54 per cent.

RBI, in its annual policy last month, had left key interest rates""including Bank Rate and repo rates""unchanged but said that if warranted, it would raise rates before the quarterly review of the economy in July.

The reverse repo rate, at which the Reserve Bank of India drains liquidity, is currently 5.5 per cent, while repo rate, at which the central bank injects liquidity, is 6.5 per cent.