Despite mixed signals following the US Federal Reserve’s 25-basis-point rate cut on 17 September, markets are pricing in the possibility of two more cuts this year—amounting to a total of 50 basis points—which is expected to bode well for emerging markets such as India.
In a press conference after the September policy meeting, Fed Chair Jerome Powell flagged that the job market was cooling. He, however, emphasised that sticky inflation remains a key risk and the central bank has the tough task of balancing the evolving, complex situation.
Despite Powell’s cautious tone, a large section of the market expects the Fed to cut rates in October and December.
According to Reuters, the CME FedWatch Tool suggests the market is currently pricing in a 90 per cent chance of a Fed cut in October and a 65 per cent probability of another cut in December.
Meanwhile, the Reserve Bank of India (RBI) will announce its policy decision on October 1, and given the favourable growth-inflation situation, it is expected to maintain a status quo on policy rates and stance.
Impact on stock portfolio
While the market is expecting two more Fed rate cuts this year, experts say the Fed is non-committal and will consider the incoming data before deciding policy move.
“Chair Jerome Powell has said there are two-sided risks—upside to inflation and downside to employment. He’s not someone who will bow to political pressure; he tends to follow the data and is cautious about rate cuts,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments.
Even though the Fed cuts rates further, it is unlikely to significantly affect the RBI’s decision and the portfolio of Indian investors.
“It won’t have much impact. Historically, India’s rate decisions are driven more by domestic factors than by what the Fed does. The US faces issues like the Lehman crisis aftermath or unemployment, which are not relevant here,” G. Chokkalingam, founder and head of research at Equinomics Research Private Limited, observed.
“Likewise, Indian macro parameters don’t really influence theirs. The only time you see some correlation is when the global economy enters a deflationary phase and oil prices crash—then both cycles may align somewhat,” said Chokkalingam.
According to Joseph Thomas, the head of research and an economist at Emkay Wealth Management, there is a high probability that the FOMC may cut the Fed Funds Rate by another 50 basis points or even 75 basis points over the next few months. This response from the Fed is a result of acknowledging that inflation is less of a concern compared to the challenges to US economic growth.
However, Thomas said that, as far as MPC is concerned, the rate decision will be solely based on domestic economic realities, rather than events elsewhere.
“A rate cut can be expected from the RBI only if the requirements of economic growth warrant it and not otherwise. With a much weaker currency, the likelihood of the RBI cutting rates further is very slim, unless or until serious challenges to growth set in,” said Thomas.
On the other hand, Sujan Hajra, chief economist and executive director at Anand Rathi Group, believes the Federal Reserve’s further action on a rate cut is likely to give RBI further room for at least a 25 bps repo rate cut.
“While the Indian rupee has significantly depreciated against the US dollar, even as the dollar index falls to a multi-year low, the RBI can find some comfort in loosening the interest rate, given inflation is still below its target, and the GST rate cuts may take it further lower,” said Hajra.
Further rate cuts by the US Fed may prompt foreign investors to reassess their stance on India, potentially triggering a rally in the Indian stock market. Foreign institutional investors have been selling Indian stocks in the cash segment since July due to weak earnings, stretched valuations, the rupee’s weakness, and tariff-related uncertainties.
The Fed and the RBI primarily focus on domestic factors to cut rates. However, a steep decline in the US benchmark rates may weaken the dollar, giving some comfort to the RBI to cut rates further without worrying much about the health of the Indian rupee.
In that case, rate-sensitive sectors, such as banking, automobiles, and real estate, may see traction, potentially influencing market sentiment in a positive way.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
