The recent decision by the US Federal Reserve to cut interest rates by 25 basis points has sent positive signals to emerging markets like India, according to market experts. This move, which marks the second rate cut this year, is seen as a preemptive step given the current macroeconomic indicators in the US.
While the US is experiencing lower growth possibilities, India is grappling with sticky food inflation. The Reserve Bank of India (RBI) is facing a complex situation involving growth, inflation, and currency movements. A note by Angel One Wealth suggests that a domestic rate cut in India would be beneficial under these circumstances.
RBI Governor Shaktikanta Das recently indicated a shift towards a softer neutral monetary policy stance to stimulate growth. However, he clarified that this change in stance does not necessarily mean an immediate interest rate cut. Das highlighted significant upside risks to inflation and expressed caution about the potential risks of a rate cut at this juncture.
In its most recent monetary policy review, the RBI maintained interest rates for the 10th consecutive meeting but altered its stance to “neutral” from “withdrawal of accommodation.” This decision reflects the central bank’s focus on balancing growth and inflation dynamics in the Indian economy.
The Fed’s rate cut comes amid a series of significant events, including Donald Trump’s election victory and rate cuts by the Bank of England. Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, noted that the Fed’s move is aimed at bringing inflation back to the target of 2 percent, which does not necessitate a restrictive policy.
The bond yields in India have declined, falling below the 4.335 percent mark, which is seen as a positive development for emerging markets. Sheth suggested that the market anticipates slower rate cuts in the future, with a possibility of inflationary pressures building up.
Overall, the US Federal Reserve’s rate cut is expected to have a favorable impact on emerging markets like India, offering some relief amidst global economic uncertainties. As central banks navigate through various challenges, including inflation and growth concerns, the focus remains on maintaining a balanced monetary policy approach to support sustainable economic growth.
