Fed rate cut will facilitate fund flows to India and emerging markets: Experts

Story by ATV | Posted by Sumana | Date 19-09-2024

Federal Reserve Board Chairman Jerome Powell

Mumbai

The US Federal Reserve's move to cut the rate by 50 basis points will facilitate flows to the emerging markets. Experts say a weaker dollar and lower rates are favourable for India and emerging economies.

Experts believe it will facilitate fund flows to India and emerging markets.

"US Fed opened the rate cut cycle with a bang with 50 bps cut in line with changed market expectations. 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 - Kotak Mahindra AMC.

The US Fed on September 18, lowered rates by 50 basis points in an 11-1 decision among the Fed governors.

Following the announcement, the U.S. stock markets jumped, with the Dow and S&P 500 making new all-time highs. But by the end of the day, the S&P 500 dipped 0.3 per cent to snap its seven-session winning streak.

The gold prices surged past USD 2600 before falling to USD 2554. Bitcoin in the crypto world also crossed USD 61,000 but fell in line with other asset classes.

Anil Rego- Founder and Fund Manager at Right Horizons PMS said, "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 added, "Lower interest rates in the US reduce returns on US-based investments. So global investors may seek higher returns in emerging markets like India, potentially increasing FPI and FDI," he added.

Economic experts are of the view that the decision will strongly boost the stock market sentiments in the country.

The US Fed rate cut is going to have an impact on the Indian economy in multiple ways. With the US being the largest economy in the world and the global linkages it has with India, an impact on various aspects of the Indian economy is also expected on different fronts.

"The US Fed rate cut will indicate a growth-supporting action for the development of the economy, which will boost stock market sentiments in the US as well as global levels, including the Indian stock market," said Jyoti Prakash Gadiaa, Managing Director at Resurgent India.

He further added that there is likely to be a direct impact on the Indian repo rate also sooner or later, RBI too will take a decision on rate cut.

"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 as well. This is likely to prompt RBI also to think of a rate cut in the near future itself to boost the growth of the Indian economy, especially because the CPI inflation in the last two months is already below the target rate of 4%," he added.

Many experts see 50 basis points cut as a positive surprise but add that it came at the right time.

"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, Ladderup Wealth Management.

Nath said that the market seems to building another 50 bps rate cut in 2024 and a few further cuts in 2025. "We feel that the Fed is not going to rush into reducing rates aggressively but act strictly based on data, as has been seen over the past two years," Nath added.