US Fed’s Rate Cut Sparks Optimism For Emerging Markets; Analysts Say India Could Benefit

The US Federal Reserve’s second consecutive 25-basis-point rate cut this year, bringing rates down to 4.75%, has led to bullish sentiments around emerging markets, including India.

Analysts on Friday suggested that the move could create favorable conditions for investment inflows to markets like India, given the Fed’s pre-emptive approach in light of mixed US economic indicators.

Financial advisory firm Angel One Wealth noted, “India, on the other hand, is facing sticky food inflation but also lower growth possibilities. The RBI is facing the trilemma between growth, inflation, and currency movements. In that sense, a domestic rate cut will help.”

However, RBI Governor Shaktikanta Das has been cautious. Earlier this week, he indicated that while the RBI has adjusted to a more neutral monetary stance, an imminent rate cut may not be in the cards.

“A change in stance doesn’t mean there will be a rate cut in the very next monetary policy meeting,” he said, adding, “There were still significant upside risks to inflation and a rate cut at this stage would be very risky,” RBI Governor stated.

For India, the Fed’s rate cut arrives at a significant time.

The RBI, during its last policy review, maintained rates at the same level for the tenth consecutive meeting but shifted its policy stance from the withdrawal of accommodation to neutral.

This shift signals a possible window for future cuts, which could aid growth if inflation moderates.

Market Anticipates Softer Fed Policy As Bond Yields Cool

Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securities, noted that while the Fed Chief remains optimistic about bringing inflation down to the 2 percent target shortly, this outlook suggests that a highly restrictive policy may not be necessary.

Sheth highlighted, “The bond yields have cooled off and slipped below the 4.335 percent mark. This should be bullish for emerging markets like India,” indicating that the market may be anticipating a slower pace of rate cuts in the future, with potential for inflation to rise.

Also Read: US Fed Cuts Interest Rates To Tackle Inflation And Labour Market Challenges