Experts were divided over the impact of the US Federal Reserve’s half-percentage-point rate cut. Some believe cheaper financing could boost investment flows, while others said it could lead to a fall in returns on equity and a rise in the price of gold.
The U.S. Federal Open Market Committee has decided to cut the target range for the federal funds rate by 50 basis points from 5.25-5.50 percent to 4.75-5 percent. The cut was expected to be only half that amount.
The US central bank kept interest rates at their highest level in more than two decades for 14 months.
According to PHDCCI President Sanjeev Agrawal, “We expect that the Federal Reserve rate cut may lead to a decline in return on equity and a rise in gold prices.”
Colin Shah, Managing Director of Kama Jewellery, said that this scenario should be viewed positively as the rate cut has ensured that gold could soon reach new heights, restoring the precious metal’s power as an investment haven.
Some experts believe the Fed’s rate cut could lead to rate cuts in emerging markets.
“The impact on the Indian economy will be increased inflow of foreign money into the Indian stock markets as well as higher FDI inflows. This will lead to a stronger rupee and lower interest rates in India, which will also allow RBI to cut interest rates,” said Rohit Arora, co-founder and CEO of Biz2Credit and Biz2X.
The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.50 per cent since February 2023 in a bid to curb inflation. The next meeting of the RBI Monetary Policy Committee is scheduled for October 7-9, when it would take a decision on the rate.
“India has remained well insulated from the interest rate movements in the rest of the world and the huge rally in risk assets plus the expected economic growth is creating an underlying inflationary force in the economy. With the RBI MPC meeting next month, a rate cut remains elusive and may not be needed in India,” said Vishal Goenka, co-founder, IndiaBonds.com.
Trideep Bhattacharya, President & CIO-Equities, Edelweiss MF, echoed a similar sentiment: “The Fed’s rate cut has been more robust than expected. The shift in US economic forecasts points to a soft period instead of a recession. This paves the way for rate cuts in emerging markets and is positive for capital flows to emerging markets.”
According to Vikas V Gupta, CEO and Chief Investment Strategist at OmniScience Capital, “Cheaper financing for global investors, especially in emerging markets like India, could boost investment flows, especially from foreign institutional investors (FIIs).”
Deepak Ramaraju, Senior Fund Manager, Shriram AMC, said: “We can expect the broader Emerging economies to take decisions to cut rates. On the domestic front, RBI will focus on the data and is likely to take a rate cut in December or 4Q FY 25. FII flows could be outward in the near term and as the US dollar starts easing, flows could return to India.
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First publication: Sep 19, 2024 | 5:20 PM IST