Experts divided on impact of US Fed rate cut for emerging markets like India

Experts shared mixed views on the impact of the half-point benchmark rate cut by the US Federal Reserve, as some believe cheaper financing could boost investment flows, others said it could lead to a decline in returns on equity and a rise in gold prices. The US Federal Open Market Committee voted to cut the federal funds rate target range by 50 bps to 4.75-5 per cent, from 5.25-5.50 per cent, against expectations of a cut half that size.

The US central bank had kept interest rates at an over two-decade high for 14 months.

According to PHDCCI President Sanjeev Agrawal “We expect that the cut in the Federal Reserve rate could lead to a decline in returns on equity and a rise in gold prices”.

Echoing similar sentiments, Colin Shah, MD at Kama Jewellery, said this scenario must be taken positively, as the rate cut has opened doors for gold to scale new highs shortly, reinstating the might of the yellow metal as an investment haven.

Some experts believe the Fed rate cut could lead to rate cuts in emerging markets.

“The impact on the Indian economy is going to be an increased inflow of foreign money into Indian stock markets as well as higher inflow of FDI. This wil lead to stronger rupee as well as lower interest rates in India giving room to RBI to lower the interest rate also,” said Rohit Arora, Co-founder and CEO, Biz2Credit and Biz2X. The Reserve Bank of India (RBI) has left the repo rate unchanged at 6.50 per cent since February 2023 as it tackled to bring down inflation. The next RBI Monetary Policy Committee meeting is scheduled to be held on October 7-9, where it would take a call on interest rate. “India has remained well insulated from the rest of the world rate movements for now and the tremendous rally in risk assets plus projected economic growth keep an inflationary underlying force in the economy. RBI MPC meets next month and a rate cut may remain elusive for now, and perhaps not required yet, in India,” Vishal Goenka, Co-Founder of IndiaBonds.com said.

Reiterating similar sentiment Trideep Bhattacharya, President & CIO-Equities, Edelweiss MF said, “Fed rate cut was cut deeper than expected, change in US economic forecasts indicate a soft patch than recession, paves way for rate-cuts in emerging markets, positive for capital flows into emerging markets”.

According to Vikas V Gupta, CEO & Chief Investment Strategist, OmniScience Capital “For global investors, especially in emerging markets like India, cheaper financing could boost investment flows, particularly from Foreign Institutional Investors (FIIs)”.

Deepak Ramaraju, Senior Fund Manager, Shriram AMC, stated, “We can expect the broader Emerging economies to undertake rate-cut decisions. On the domestic front, RBI will focus on the data and might likely undertake a rate cut in December or 4Q FY 25. The FII flows can be outbound in the short term and as the US dollar starts easing, the flows can come back into India.”