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What will the Fed do?

Yesterday, the RBI surprised the market by maintaining a status quo. Today the U.S. Federal Reserve will take a call while the world eagerly watches

Today, markets all across the globe will be eagerly awaiting the results of the Federal Reserve Bank of the U.S. meeting. The Fed is expected to announce a further 25 bps cut in the Federal Funds Target Rate. But there is also a slim chance of no revision in rates. The Fed's assessment of the current state of the U.S. economy would have a bearing on the movement of the dollar. The Bank of Japan is also likely to keep its key rate unchanged today.

Back home, the uncertainty was telling at the start of the week. No one knew what decision the Reserve Bank of India (RBI) would take at the annual policy meeting. A hike in the repo or reverse repo would provide the bears a fresh opportunity to nail the bulls. On the other hand, a status quo would definitely perk up the mood on the street. But fear abounded that the RBI would hike the repo rate by 25 bps to contain inflation.

As a result, on Monday, the key indices did close lower. During the day, they struggled to find any direction resulting into sideways movement. Profit booking was witnessed in heavyweights like RIL, ICICI Bank and Tata Steel. Volumes too dried up ahead of the outcome of RBI's monetary policy meet on Tuesday.

So, on Tuesday, when the RBI chief Y.V. Reddy decided to leave the key rates unchanged, and instead hike the cash reserve ratio (CRR) by another 25 bps, the bulls did dance. The RBI's decision to maintain status quo on interest rates was aimed at curtailing inflation by sucking out excess liquidity. At the same time, the move will keep rates mostly stable, thus allowing the growth momentum to continue. Going ahead, the RBI will be closely watching the inflation data and will attempt to control it without compromising too much on growth.

Stocks and bonds rallied following the RBI's announcement. The rally got a further boost from the Finance Minister who decided to extend tax concessions to the IT sector under the STPI scheme for one more year. PSU oil firms too gained after their proposed refineries too received tax exemption. Let's see what the Federal Reserve has to say today and how the market reacts.