US Fed Rate Cut Consecutively For Second Time, Seen Positive For Emerging Markets

(Photo : Jerome Powell)
Jerome Powell

The recent decision by the US Federal Reserve to implement a second consecutive rate cut this year of 25 basis points has been viewed as a positive development for emerging markets, including India. This move, which was not unexpected, has been seen as a pre-emptive measure in light of the current US macro indicators.

The rate cut is expected to have a bullish impact on emerging markets like India. According to market experts, the reduction in interest rates to 4.75 per cent could stimulate economic growth in these regions.

However, the situation in India is somewhat complex due to the country's ongoing struggle with food inflation and lower growth possibilities. The Reserve Bank of India (RBI) is currently grappling with a trilemma of growth, inflation, and currency movements. In this context, a domestic rate cut could potentially provide some relief.

This perspective was shared in a note by Angel One Wealth, which highlighted the challenges faced by the Indian economy.

RBI Governor Shaktikanta Das recently stated that while the central bank has shifted towards a softer neutral monetary policy stance to spur growth, this does not necessarily mean that an interest rate cut will happen immediately. He emphasized that a change in stance does not guarantee a rate cut in the next monetary policy meeting.

US Fed's Rate Cut and Its Global Impact

He further cautioned that there were still significant upside risks to inflation and that a rate cut at this stage would be very risky. The RBI, in its recent monetary policy review, kept interest rates unchanged for the 10th straight meeting. However, it switched its monetary policy stance to neutral from withdrawal of accommodation. This move has been interpreted as a possible indication of a future rate cut.

The US Fed's rate cut comes after a highly eventful week, which saw Donald Trump's election victory and rate cuts by the Bank of England. Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, expressed optimism about the impact of the rate cut on emerging markets. He noted that bond yields have cooled off and slipped below the 4.335 per cent mark, which should be bullish for markets like India.

Sheth also suggested that the market is anticipating slower rate cuts going forward and there may even be chances of inflation rising. However, the Fed Chief remains hopeful of taming inflation back to the 2 per cent target soon, thus not warranting a restrictive policy.

India's Economic Outlook Amid Global Changes

In India, the RBI Governor has hinted at no rate cut in December, citing mixed data. Despite concerns about growth, especially after official data showed growth slowing to a 15-quarter low of 6.7 per cent in the first quarter of FY25, the RBI has been holding onto its estimate of 7.2 per cent real GDP growth for FY25.

Inflation in India rose from 3.65 per cent in August to 5.49 per cent in September due to rising food prices. However, Das remains bullish on the outlook for the Indian economy. He stated that the RBI tracks over 70 high-speed indicators to arrive at its estimates and described both the positive factors pushing the number and the negatives pulling it down.

The RBI Governor also ruled out an immediate rate cut as inflation remains a concern. He cited the robust recovery in car sales during October as a positive sign, although he admitted that sales of fast-moving consumer goods in urban areas remained subdued.