Federal Reserve can hike funds rate anytime after April

The Forward Open Market Committee (FOMC)'s critical meeting concluded on 18 March without any fireworks. Equity markets chose to focus on the dovish start of the commentary, which started by saying economic growth has moderated "somewhat."

The strength of the dollar and sharp fall in crude oil prices are going to impact US economic growth in 2015, which is why growth estimates have been revised down from 2.6-3% to 2.3-2.6%, even though the long-term growth forecast has been left unchanged.The big take away from the meeting is that the Federal Reserve is no longer going to give any guidance before effecting a rate hike after April.

Economists believe that the Federal Reserve has been preparing markets for an era of 'no guidance' and which seems to be highlight of the March statement. So though a rate hike has been ruled out in April, anytime after that is a possibility. 

However, given the weakness in growth, consensus view has now shifted the possibility of a hike to September, if at all it happens in 2015. What this implies is that before every meeting of the FOMC, financial markets will see volatility.

In its 11 March note, Morgan Stanley maintained that the Federal Reserve will look at its first rate hike in early 2016 and that too would be data dependent. The FOMC has also pared its rate hike projection path with 13 members (up from eight members in December 2014) expecting rates to remain below 1% by end of 2015. Nirmal Bang's Nikhil Gupta is all for first impressions and that the dovish first few words of the Fed's statement has set the tone for markets. 

Based on this, he assesses that the Fed is likely to postpone rate hike to 2016. Vivek Gupta of CapitalVia Global Research believes a rate hike could be expected in September rather than June once the Fed is more confident about inflation & labour market condition.

Whenever the Fed delivers the rate hike, markets are expected to see some turmoil. Fixed income experts believe foreign investors could pull out $4-5 billion soon after the rate hike is effected by the Fed Reserve. 

Given that India remains the favourite equity market for foreign investors, portfolio funds are expected to continue to flow into India, which would support the rupee in case there is flight of capital to safety.

A majority of investors (58%) polled by Bank of America Merrill Lynch expect rupee to be in the range of Rs 60-65/USD. Only 38% investors expect INR to cross Rs65/USD in 2015. Investors are betting on the call that India is set to emerge as the fifth largest economy after China. It has already surpassed Russia and will soon go past Brazil to emerge as the second largest emerging market after China.