The U.S. Federal Reserve’s 50-basis-point rate cut on Wednesday is expected to facilitate increased fund flows to emerging markets, including India, according to experts. A weaker dollar and lower interest rates create favorable conditions for such economies.
“From inflation is transitory to higher rates for longer, the Fed has come a long way to meet market expectations. This rate cut will facilitate flows to the emerging market assets with a weaker dollar and lower rates,” said Nilesh Shah, MD of Kotak Mahindra AMC.
Anil Rego, Founder and Fund Manager at Right Horizons PMS, pointed out the potential benefits for India. “US Fed rate cut can positively affect India by boosting capital inflows, enhancing stock market performance, and reducing borrowing costs. However, it can also lead to challenges for exports due to a stronger rupee.”
Rego said that lower U.S. interest rates make U.S.-based investments less attractive, potentially driving global investors to seek higher returns in emerging markets like India, thereby increasing foreign portfolio investment (FPI) and foreign direct investment (FDI).
Economic analysts agree that the Fed’s decision is likely to boost market sentiment in India. “The US Fed rate cut will indicate a growth-supporting action for the development of the economy, which will boost stock market sentiments both in the US as well as globally, including the Indian stock market,” said Jyoti Prakash Gadia, Managing Director at Resurgent India.
Gadia said that the Reserve Bank of India (RBI) may come under pressure to follow suit with its own rate cut, especially since India’s Consumer Price Index (CPI) inflation has remained below the target of 4% in recent months. “Although, in India, RBI as the controller of monetary policy, primarily decides the repo rate based on inflation and growth rate trade-off, a rate cut by the US Fed is bound to put pressure on RBI. This is likely to prompt the RBI to think of a rate cut in the near future to boost the growth of the Indian economy, especially because CPI inflation in the last two months is already below the target rate of 4%,” he added.
Many experts view the 50 bps cut as a timely, positive surprise. “”The rate cut today by the Fed was widely expected. However, a 50 bps cut is a positive surprise. It indicates the confidence of the Federal Reserve in its policy outcomes over the last two years, as it stood steadfast in its resolve to bring down inflation. With inflation now within the targeted zone, but still a bit away, and labour market conditions becoming a concern, the cut is coming at an opportune time,” said Raghvendra Nath, MD of Ladderup Wealth Management.
Nath said that while another 50 bps cut may be in the cards for 2024, the Fed is unlikely to pursue aggressive rate reductions, opting instead for a data-driven approach, as seen in recent years.
(With ANI input)