Rajan Sees Fed Raising Rate as Much as 25 Basis Points Next Week

  • `The Fed has prepared the way very carefully for an increase'
  • Rajan says Fed move probably between 1 and 25 basis points

Indian central bank Governor Raghuram Rajan expects Federal Reserve policy makers to increase interest rates by as much as a quarter point next week.

The Reserve Bank of India is looking at a 70 percent to 75 percent probability of a rate hike based on an assessment of market movements, Rajan told reporters on Friday after a central bank board meeting in Kolkata. India is ready for any eventuality and the central bank will determine how much liquidity to supply, he said.

“The Fed has prepared the way very carefully for an increase, so likely at this point they will go ahead -- at least that is our betting," Rajan said. “I don’t know how much it would be. My guess is not more than 25 basis points, but it could be anywhere between 0 and 25 basis points, probably between 1 and 25."

Rajan, a former chief economist at the International Monetary Fund, left the highest borrowing costs in major Asian economies unchanged earlier this month as risks to his inflation target increase. Goldman Sachs Group Inc., Australia & New Zealand Banking Group Ltd. and Mizuho Bank Ltd. expect him to keep India’s repurchase rate at 6.75 percent throughout 2016.

Falling Stocks

India’s world-beating 7.4 percent pace of economic growth hasn’t prevented declines in stocks, bonds and currency as investors brace for a looming U.S. rate increase. The rupee has weakened 1.8 percent against the dollar so far this quarter, one of Asia’s worst performances, while the S&P BSE Sensex is down 4.5 percent in the same period.

The probability the Fed will increase its benchmark by its next meeting on Dec. 15-16 was 78 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.