 "The US Federal Reserve is likely to cut interest rates. File image/ Reuters")
All eyes are on the US Federal Reserve.
The US central bank is likely to cut interest rates – the first time it will do so in four years.
The rate has been in the 5.25 per cent to 5.50 per cent range for over a year.
The Fed has been keeping its main interest rate at a two-decade high in hopes of grinding down on the economy enough to stifle high inflation.
India’s stock market on Wednesday traded a bit lower off its record highs hours ahead of the expected rate cut.
The Fed’s Federal Open Market Committee will give its interest rate decision at the conclusion of its meeting on Wednesday after which Chair Jerome Powell will hold a press conference.
The last Fed rate cut was in March 2020 during the COVID-19 pandemic.
But what will the Fed do? And how could its decision impact the stock market, the IT sector and gold prices?
Let’s take a closer look:
How will its decision impact India’s stock market?
When it comes to the Indian stock market, investors are optimistic but slightly hesitant.
“While the undertone of Indian markets is optimistic, there is some tentativeness among investors at all-time high levels ahead of the key Fed rate decision,” said Sameet Chavan, head of research at Angel One.
While the rate cut is widely expected, the question being asked is how much the Fed will cut – 25 basis points or 50 basis points.
The odds of a 50-bps cut have climbed recently – to 67 per cent from 50 per cent last week – raising the chances of foreign investors shifting funds to emerging markets such as India in search of higher returns.
Some experts say rate cuts by the Fed are likely to make emerging markets like India more attractive.
“Interest rate cuts reduce the cost of borrowing in U.S. dollars, thereby creating easier liquidity conditions for companies around the world,” Quilter Cheviot’s Richard Carter told The Wall Street Journal.
“Lower US interest rates should also lower the yield available on US assets such as Treasurys, thus making other markets relatively more attractive,” Carter added.
However, others point to history which shows that rate cuts often impact Indian stock market negatively.
“Historically, Indian markets have tended to fall after a Fed rate cut, as these cuts are often a signal of economic weakness that can trigger risk-off across the globe. Investors get scared of an impending recession and pull themselves back from so-called riskier assets, which place Indian markets in that bracket, too,” Dr Ravi Singh, SVP Retail Research, Religare broking, told India Today.
But people think that this time could be different – particularly for the IT sector.
India Today quoted JM Financial as saying Indian IT firms may not be as affected by the rate cuts.
This is because they have already cut their spending and thus may not be subject to similar pressures in previous rate cut cycles.
What about the IT sector and gold?
JM Financial noted that the impact on IT firms could be far less than feared – which could bode well for Infosys, Tech Mahindra, and Wipro.
The likelihood of a bigger rate cut has also prompted fears that the Fed may have started its easing cycle a little too late.
The Fed’s decision and commentary on growth will influence the near-term trajectory of Indian equities since those will impact foreign inflows and the outlook for US-dependent sectors such as IT and pharma, analysts have said.
Indian Express noted that a rate cut by the Fed could lead to investors eyeing markets like India as a better option for the currency carry trade.
It could also lead to a flux in emerging markets.
Mint quoted Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, as saying the Indian markets could mount a fresh rally, at least temporarily.
Rate cuts in the US could also make India a better destination for investors.
“A 25-bps cut could trigger a temporary rally in Indian markets due to improved global risk sentiment,” Goel said.
“Additionally, this could attract foreign investment to India, boosting stock markets. However, the sustained impact will depend on the RBI’s monetary policy response and broader global cues.”
Market expert Sunil Subramaniam told Economic Times, “With a Fed rate cut, more liquidity from FIIs would flow into emerging markets like India, and FIIs understand these businesses as American consumers have been using similar ones.”
When it comes to gold, the precious metal has already been scaling heights in anticipation of the rate cut and the ECB 25 bps rate cut last week.
Gold is usually seen as a good investment when interest rates are lower, and of course, as a hedge against inflation.
“As such an important driver of global growth, this is bound to have an effect on asset prices around the world,” Richard Carter, head of fixed interest research at Quilter Cheviot, told The Wall Steet Journal.
With inputs from agencies