On September 20, 2024, the US Federal Reserve made a significant decision to cut its benchmark interest rate by 50 basis points, bringing the rate down to 4.75-5% for the first time in four years. This move is part of a broader strategy, with expectations of systematic rate cuts totaling about 250 basis points until 2026 [01420fcc]. The Fed's decision is a response to economic challenges stemming from the COVID-19 pandemic, which disrupted supply chains and led to rising prices, with US inflation peaking at 9.1% in mid-2022 [7acb7eae]. The recent cut also comes amid rising unemployment, which increased to 4.2% from a record low in April 2023 [7acb7eae]. This has raised questions about its potential impact on the Indian economy, particularly in light of the Reserve Bank of India's (RBI) current stance on monetary policy.
S&P Global Ratings has reaffirmed India's economic growth forecast for FY2024-25 at 6.8%, indicating a stable outlook despite recent economic challenges. The agency expects the RBI to initiate interest rate cuts in October 2024, with projections suggesting that the RBI may cut rates twice by March 2025 [ee72efdc]. The growth projection for FY2025-26 has been retained at 6.9% [ee72efdc]. The RBI has indicated that it will not immediately follow the Fed's lead, maintaining a focus on domestic inflation, which is currently around 5% [e4b050ee]. Deepak Ramaraju from Shriram AMC suggests that the RBI may consider a rate cut in December 2024, emphasizing that the central bank will focus on data before making a decision [0b30dcf4]. Meanwhile, Dharmakirti Joshi from CRISIL emphasized that the RBI's monetary policy will largely depend on domestic inflation and Consumer Price Index (CPI) rates [01420fcc]. Madhave Arora from Emkay indicated a wait-and-watch approach from the RBI, with the next Monetary Policy Committee (MPC) meeting scheduled in over 20 days [0b30dcf4].
In the wake of the Fed's announcement, the Indian Rupee appreciated to Rs 83.69 against the US Dollar, reflecting a positive market reaction [01420fcc]. Some economists believe that the Fed's rate cut could lead to increased capital inflows into India, particularly benefiting companies with US dollar loans, while also potentially lowering domestic bond yields below 6.8% [e4b050ee][7acb7eae]. However, the RBI is expected to maintain a cautious approach, with any rate cuts not anticipated until December 2024 [4da33e4e].
The recent Fed rate cut is expected to stimulate the US economy amid global uncertainties, which could have ripple effects on Indian markets. Potential benefits for India include increased foreign investment, lower borrowing costs, and economic growth [5dff16f0]. However, challenges such as currency appreciation, inflation control, and financial stability remain [5dff16f0]. The Fed may cut rates up to six more times by 2025, targeting a range of 3% to 3.5% [7acb7eae].
In a recent analysis by Pareekh Consulting, the BFSI (Banking, Financial Services, and Insurance) sector is projected to experience revenue growth of 6-7% for leading Indian IT companies by fiscal 2026, following the US Fed's rate cut. The Indian IT services sector, valued at $250 billion, is expected to rebound, with BFSI projected to achieve over 500% revenue growth by fiscal 2026 after negative growth in the previous year [03994540]. The Fed's rate cut is seen as a catalyst for increased discretionary spending and improved capital expenditure outlook for enterprises. The second half of fiscal 2025 is anticipated to be stronger, with positive impacts expected in the fourth quarter of 2024. However, challenges remain, including economic uncertainty and competition, which may affect the recovery of the IT services industry [03994540].
Despite the Fed's actions, the outlook for Foreign Portfolio Investors (FPIs) remains cautious. In 2024, FPIs have invested $8.68 billion in India, with $3.50 billion coming in September alone. This is a decrease compared to $14.76 billion during the same period in 2023, with 84% of FPI flows directed towards IPOs this year [d8043d9b]. Experts warn that India's high valuations may deter further FPI inflows despite the rate cut, suggesting that a market correction of 5-10% could attract more investments [d8043d9b].
Chris Wood, Global Head of Equity Strategy at Jefferies, noted that while the recent rate cut is unlikely to increase fund flows to India due to geopolitical risks and uncertainties surrounding the US Presidential elections, it could enhance global liquidity, positively affecting Indian equities [5d6e2979].
Following the Fed's decision, Indian financial markets reacted positively, with the Sensex and Nifty indices reaching record highs. The Sensex surpassed 83,700, closing at 83,635, while the Nifty climbed to 25,611, reflecting a surge in investor confidence [d57d97dd]. The banking sector played a crucial role in this rally, with the Nifty Bank index rising by 468 points (0.89%) [d57d97dd].
The IT sector may face challenges due to currency appreciation, while the pharmaceuticals sector could benefit from increased US healthcare spending. The banking sector is expected to see credit growth, and money markets may experience increased liquidity as a result of the Fed's actions [5dff16f0]. Additionally, bond markets may see yield compression and lower borrowing costs, prompting the RBI to potentially intervene to stabilize the Indian Rupee [5dff16f0].
Looking ahead, analysts expect that long-term growth in the Indian economy will continue, driven by rising per capita income as GDP increases. However, the interplay between US monetary policy and Indian economic indicators will be crucial in determining the future landscape for investors [01420fcc]. As gold prices reached record highs, currently priced at ₹73,510, influenced by a weaker dollar and expectations of a U.S. interest rate cut, the overall market sentiment remains cautiously optimistic [f8644ff0].
In summary, while the US Fed's rate cut has provided a boost to India's financial markets and the IT sector, particularly BFSI, the outlook remains mixed as analysts weigh the implications of global economic conditions and domestic valuations. The RBI's cautious approach and the anticipated long-term growth trajectory will be key factors in shaping India's economic landscape in the coming years [d57d97dd]. Furthermore, the legal implications of these changes necessitate updated regulatory frameworks and international arbitration mechanisms to maximize benefits and minimize risks [5dff16f0].