US Fed to Cut Rates by 25 bps; Temporary Rally in Indian Market Expected: Amit Goel of Pace 360

The US Federal Reserve is on the verge of making a major policy announcement, as the financial world keenly watches the outcome of the Federal Open Market Committee (FOMC) meeting. Scheduled for September 18, this decision is expected to bring about the first interest rate cut in four years. Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, anticipates a 25 basis points (bps) cut in the benchmark policy rate. This move could potentially trigger a short-term rally in the Indian market, driven by improved global risk sentiment and expectations of foreign investments flowing into the country.

FOMC to Announce Key Rate Cut Decision

The FOMC, led by US Fed Chairman Jerome Powell, has begun deliberations for its sixth monetary policy meeting in 2024. This meeting holds significant importance, as it is widely anticipated that the central bank will reduce its policy rate by 25 bps. According to Powell, the economic conditions are now conducive for a rate adjustment, especially with inflation nearing the US central bank’s 2% target.

Powell stated at the Fed’s annual economic conference in Jackson Hole, Wyoming, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Market Sentiment and Potential Impact on India

The US Federal Reserve’s previous policy meeting saw interest rates being held at the 23-year high of 5.25% to 5.50%. As inflation begins to come under control, policymakers now feel the time is right to ease the monetary stance. This has important implications for global markets, including India. Amit Goel, in an interview with Mint, suggested that a 25 bps cut could strengthen the Indian rupee, attract foreign investments, and improve market sentiment temporarily.

Indian equity markets are likely to experience a short-term rally on the back of this announcement. However, long-term impacts will depend on the Reserve Bank of India’s (RBI) response and other global market cues.

Inflation and Labour Market in Focus

The labour market continues to be a key concern for the Federal Reserve as they deliberate on their next move. Recent data, including the US consumer price index (CPI) report, has shown mixed signals. Underlying inflation has seen a slight increase, even as the annual CPI came in at a 43-month low. This has shifted market expectations from a potential 50 bps cut to a more moderate 25 bps cut.

In India, rising food inflation and unemployment remain top challenges, and Goel notes that while a Fed rate cut may provide temporary relief, the structural issues within both the Indian and US economies will require more comprehensive policy responses.

Indian Rupee and Foreign Investment

A key element of Goel’s analysis is the potential impact of the Fed’s decision on foreign investment into India. As global risk sentiment improves, foreign investors may look toward emerging markets like India. A stronger Indian rupee could result from this increased capital inflow. However, Goel warns that this could also make Indian exports less competitive in global markets, thus presenting a mixed impact.

RBI’s Divergence from Global Trends

While global central banks, including the Fed, are shifting toward rate cuts, the RBI has maintained its focus on achieving a 4% inflation target. India’s central bank has consistently pursued a disinflationary stance, and Goel does not foresee any immediate changes to this policy. However, should inflation remain under control in India, the RBI may reconsider its position later in the year.

“The RBI is adopting a cautious approach. Any rate cuts from the RBI will likely be timed carefully and could occur later in 2024, depending on inflation trends and global market conditions,” Goel remarked.

Geopolitical and External Factors

As the global market braces for external shocks, such as geopolitical conflicts and the upcoming US presidential elections, volatility is expected to increase. Goel believes that these factors will weigh heavily on investor sentiment and market performance in the months ahead.

“The geopolitical landscape and the US elections in November are likely to introduce volatility. While we expect markets to remain within a range, investors should be prepared for sharp movements,” he added.

For the Indian markets, Goel projects that the Nifty 50 will remain between 23,500 and 26,000 by the end of 2024, provided that global risks are managed effectively and domestic economic conditions remain stable.

Conclusion

As the US Federal Reserve prepares for a widely anticipated rate cut, the global and Indian markets are poised for a potential rally. While short-term optimism may prevail, longer-term outcomes will be determined by various factors, including domestic policy responses and global economic stability. Investors are advised to remain cautious amid the uncertain global environment.

The FOMC’s decision tomorrow will set the tone for the remainder of the year, and its effects will be felt across the global financial landscape, particularly in emerging markets like India.