Analysts in India are weighing in to determine whether or not the Reserve Bank of India will adopt the US Federal Reserve’s 50-bps rate cut, or if it will continue its current focus on managing domestic inflation.
US Federal Reserve announced that it would reduce its benchmark rate by 50 basis points, to between 4.75% and 5.00%. This is the first time in 4 years, they have reduced their rate.
This decision was announced on 18 September following the Fed’s 6th policy meeting in 2024. It aligns Wall Street predictions and shows a change of focus away from fighting inflation towards supporting a weakened job market.
The timeline for the Indian central banks’s adoption of the Fed is not agreed upon by all analysts in India. They differ on how soon the Indian central bank would adopt the Fed.
Geojit Financial Services: RBI rate cuts in October possible
V K Vijayakumar is the Chief Investment Strategist of Geojit Financial Services. He said that the Fed’s actions set the stage for possible rate cuts from the Reserve Bank of India.
Vijayakumar said that there could be two 25-basis point rate cuts by March of next year, with the first one expected as early as October.
“He said”
It is not impossible that the RBI will cut rates in October. The Q1 signal is not positive, and two independent members of the Monetary Policy Committee have already called for a rate cut. Earnings growth was modest in Q1, and downgrades in some areas indicated weakness. CPI inflation is now expected to hover around 4%.
Emkay says that the response from RBI may not be received until December.
Emkay analysts said that Fed rate cuts marked a start to a new cycle of easing, but their mixed messages have left the markets in doubt.
Madhavi Aroa, Chief Economist at Emkay Global Financial Services said that while the markets heavily priced a cut of 50bps, it was still surprising, since the Fed typically provides clear signals before making a decision.
an outsized cut.
Arora stated that Powell had a hard time justifying the contradiction of starting the cycle by making a large cut and maintaining the good state of the economy.
She said, “While we never considered ourselves in a recession camp (as evidenced by recent data on labor), a slowdown has already begun. The pace at which this slowdown occurs will determine the rate reductions that are to come.”
The markets are pricing in 60bps of eased policy for 2024, and 150bps for 2025. This is significantly more than what the Fed has projected.
Emkay experts predict that India’s RBI will maintain its cautious approach, and that a rate reduction could be on the way by December.
Arora stated that the RBI has the flexibility to focus on the domestic market and manage risk, even though there is still over 20 days until its next MPC.
She says
RBI will likely maintain a wait-and watch stance, and continue to focus on being “actively deinflationary”, with the first rate reduction likely in December. The chances of an early rate cut are still low, but we’re continuing to see shallow
Both the Fed and RBI have cut their rates in this cycle.
Prabhudas Lillian: India will not cut rates before the end of Q4FY25.
Prabhudas lladher provided a more detailed view of India’s response to the US Fed decision. He also highlighted the divergence in global and local trends.
Arsh Morgre, economist at PL Capital, compared the post-Global Financial Crisis era (2013-18) to that of the RBI’s independence in managing inflation and economic stability.
Mogre says
Fed projections indicate a further cut of 50 basis points in 2024, and another 100 in 2025. This would mark a prolongation of the easing cycle…However the RBI might not follow Fed’s aggressive ease as India’s rates cycle is historically driven by macroeconomic dynamics at home, such as during 2013-2018 when the RBI took independent action to manage inflation and economic stability following the GFC stimulus.
He added that this divergence shows India’s willingness to cut rates only when domestic weakness is evident, not just in response to rate cycles globally.
Mogre said that India’s strong macroeconomic fundamentals and inflation controlled, as well as a manageable deficit in the current account, allowed RBI to concentrate solely on managing inflation.
He said that the RBI will make rate cuts in Q4 of FY25 if inflation continues to align with its target. However, food prices are still volatile and this is pushing them towards a cut.
What about the foreign inflows of money?
In the past, rate cuts in developed markets have triggered a flow of funds into emerging markets. A rate cut in the US of up to 50 basis points will likely cause the return on fixed incomes in that country to fall, which makes emerging markets such as India more attractive.
Vijayakumar said that due to India’s high valuations, foreign institutional investors have been wary of investing there.
He said that with few alternatives, and with the Federal Funds Rate projected to stay at around 3,4% by 2025, it is likely more capital will flow to emerging markets. India has the most promising growth prospects.
Ajay bagga, a market expert’s view resonated with Vijayakumar:
Global funds looking for returns should continue to pour into emerging markets. India, which has a solid macroeconomic foundation, a monetary room to reduce rates, good corporate earnings, and a vibrant first market, is in a great position to capture a large share of foreign capital flows.
However, government officials downplayed its impact. The Chief Economic Advisor V. Anantha Nageswaran stated that the Fed rate reduction would have a “muted” impact on India, as the market had already priced in the effects.
Ajay Ajay Seth Ajay told Moneycontrol India’s Department of Economic Affairs (DEA) Secretary Ajay Ajay Ajay said that foreign portfolio investments (FPIs) in India are not expected to change significantly and will not require close monitoring for market stability.
India’s gold, rupees and wider forecast
The Fed rate reduction has had an immediate effect on the Indian rupee.
Following the Fed announcement, the rupee rose to 83.6 per dollar. This reaction reflects the broader optimism of the market about India’s prospects for economic growth in light of the global monetary ease.
Mogre emphasized the advantages for Indian assets like gold which performs well in periods of monetary ease.
He said that Indian corporations may also increase the use of currency swaps in order to benefit from lower U.S. rates and reduce their borrowing costs.
The Indian market is expected to gain from the Fed’s current easing cycle. This will be especially true if institutional foreign investors (FIIs), who are currently increasing their investment, continue this trend.
India’s macroeconomic fundamentals are strong, and it is in a good position to draw foreign capital, particularly into real estate, infrastructure, and non-banking finance companies (NBFCs).
Nevertheless, it is important to remain cautious. India’s markets could be temporarily affected by the volatility that surrounds the US Presidential election.
Bagga admitted this and pointed to the tendency for U.S. stocks to fall before elections, then rise again afterward.
The RBI will follow the Fed’s rate cut. This post may change as new information is released.
