Explained: What US Fed's 50 bps rate cut means for Indian economy

The Fed's decision signalled a shift towards easing monetary policy, with experts divided on its implications for the global economy, including India. Here's a detailed look at how the bigger-than-expected rate cut could impact the Indian economy and the broader market.

In Short

• US Fed's 50 bps rate cut surprises markets, signals policy shift
• Indian equity markets expected to consolidate amid global uncertainty
• Lower interest rates may benefit India’s infrastructure and metals sectors

The US Federal Reserve cut its benchmark interest rate by an unexpected 50 basis points (bps) on Wednesday, a move that caught many by surprise.

The Fed's decision signalled a shift towards easing monetary policy, with experts divided on its implications for the global economy, including India.

Here's a detailed look at how the bigger-than-expected rate cut could impact the Indian economy and the broader market.

Impact on stock market and broader economy

The 50 bps rate cut was unexpected for most market participants who had anticipated a smaller 25 bps reduction.

According to Apurva Sheth, Head of Market Perspectives at SAMCO Securities, the decision sparked mixed reactions in the market, with initial volatility calming down to modest gains by the end of the trading session.

Sheth added that the Fed’s primary goal was to support the labour market, which has shown signs of stress. He suggested that investors focus on defensive sectors such as FMCG and pharmaceuticals, while also considering the potential of precious metals like gold and silver until there’s more clarity on market direction.

Meanwhile, Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, described the Fed’s move as one that could push equity markets into a consolidation phase.

He pointed out that Fed Chair Jerome Powell's optimistic remarks on inflation reaching the 2% target were well-received, especially considering the solid US economic growth and robust labour market.

For India, this could mean more accommodative policies in the near future.

Vijayakumar expects that the US Federal Reserve’s aggressive cuts will pave the way for the Reserve Bank of India to lower interest rates.

With India’s consumer price inflation (CPI) already easing below the RBI’s 4% target, two potential rate cuts of 25 bps each by March 2025 seem likely. He noted that the banking sector, particularly rate-sensitive industries, could see favorable conditions as interest rates decline, benefiting sectors such as infrastructure.

Vijay Bharadia, Founder of Wallfort Financial Services Ltd, also agreed that the rate cut marks a bold move that may encourage other global central banks, including the Reserve Bank of India (RBI), to adopt a softer monetary stance.

He pointed out that rate cuts would benefit leveraged sectors such as metals and infrastructure. However, the rate cut might put pressure on India’s banking sector, especially with a declining CASA (current account savings account) base.

As interest rates fall, bank deposits may become less attractive to customers, affecting banking profitability in the medium term.

Deepak Ramaraju, Senior Fund Manager at Shriram AMC, echoed similar concerns. He believes that while the Fed's 50 bps rate cut may bring relief to equity markets, the domestic banking sector could face challenges due to outbound flows of foreign institutional investments (FII) in the short term.

Nevertheless, a weakening US dollar could draw capital back into India, stabilising markets by the end of the year.

Impact on bonds and rupee

Suman Chowdhury, Chief Economist at Acuité Ratings & Research, highlighted the potential impact on India’s bond market. A cut in the US interest rate could increase foreign capital inflows into the Indian debt market, leading to lower domestic bond yields, Chowdhury said.

India's 10-year g-sec yield, which has already dropped below 6.8%, could fall further, benefiting both government borrowing and the corporate bond market, he noted, adding that lower borrowing costs could encourage Indian banks and infrastructure companies to issue long-term bonds, increasing fund mobilisation options.

Chowdhury also pointed to the possible impact on the rupee. The inflow of foreign capital could strengthen the Indian currency in the near term, though RBI interventions might prevent the rupee from appreciating too rapidly. Despite this, he anticipates a gradual depreciation of the rupee to 84.5 by the end of the fiscal year.

Will RBI follow suit?

With India’s inflation rate easing, the Fed’s larger-than-expected rate cut has heightened expectations of an RBI policy response.

Chowdhury noted that while RBI is likely to make its own independent decisions, the chances of a 25 bps rate cut in December or the last quarter of FY25 have increased significantly, especially if food inflation remains under control.

Unmesh Kulkarni, Managing Director at Julius Baer India, added that the Fed’s decision reflects a pivot in global monetary policy, with more rate cuts expected over the next year.

He highlighted that historically, US equity markets perform well during rate-cutting cycles, especially if a recession is avoided.

Is India well-positioned to benefit from rate cut?

This "risk-on" environment could potentially boost equities, including Indian stocks, though volatility might remain elevated due to ongoing concerns about global recession risks and political uncertainties in the US.

Simply put, the Fed’s 50 bps rate cut is likely to have broad-reaching implications beyond the US economy, potentially triggering rate cuts by other central banks, including the RBI.

While certain sectors in India, like infrastructure and metals, stand to benefit from these policy shifts, the banking sector may face short-term challenges due to lower deposit interest rates.

However, with inflation easing and bond yields softening, India could be well-positioned to navigate this new global monetary landscape, provided that domestic inflation stays in check and foreign capital inflows remain steady