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US Fed has announced a 50-bps cut in its lending rate.
The policymakers believe that this is the start of rate cut cycle. They expect another 50 bps cut by the end of this year.
RBI is also expected to reduce the repo rate following the current announcement. Here is what the industry leaders have to say on the effects of this announcement on the economy and the market:
Avnish Jain, Head - Fixed Income, Canara Robeco Mutual Fund
The Fed is likely to continue to monitor the labor markets. Markets were not enthused by the overall policy outcome, which may have been perceived less dovish and US yields were higher than the lows seen in recent week. Going forward, incoming data is likely to dictate further rate actions.
Deepak Agrawal, CIO - Debt, Kotak Mahindra AMC
Post today's action, Fed action would be data dependent and unless growth data worsens significantly (we assign a low probability of same), we believe subsequent policy action would be 25 bps.
Deepak Ramaraju, Senior Fund Manager, Shriram AMC
The US Fed cut the interest rate by 0.5% for the first time in the last 4 years. Such high monetary correction was earlier undertaken only during the global financial crisis, indicating the severity of the economic stress the US is going through.
This will continue to add to uncertainty in the equity markets. The equity markets reacted negatively and ended in the red. 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 foreign institutional inflows can be outbound in the short term and as the US dollar starts easing, the flows can come back into India. The markets are expected to remain in range with positively biased.
Deepak Shenoy, Founder & CEO, Capitalmind
The Fed’s 50 bps rate cut comes as a positive surprise, signaling confidence in its inflation control measures. Markets reacted predictably—yields and stocks edged up and gold rose. A weaker dollar will help US exports and improve the global economic outlook. The Fed also projects two more 25 bps rate cuts in 2024 and additional cuts through 2025 and 2026, which is positive for the global outlook. In India, with CPI inflation below the RBI’s target, similar rate cuts are possible. However, the key challenge remains liquidity in our system, as banks have sufficient deposits but are cautious in lending.
Nilesh Shah, MD, Kotak Mahindra AMC
From inflation is transitory to higher rates for longer, Fed has come a long way to meet market expectations. This rate cut will facilitate flows to the emerging market assets with weaker dollar and lower rates.
Siddharth Chaudhary, Senior Fund Manager – Fixed Income, Bajaj Finserv AMC
This looks like an apt decision from risk-management perspective, the economic cost of this pre-emptive 50 bps cut is lower than the cost of waiting and then being forced into a bigger cut later if incoming data suggest further deterioration in the labor market. Also note it is usually too late to cut rates by the time the evidence of labor-market deterioration is clear.
Globally, the other central bank which matters now is Bank of Japan. It has got competing considerations such as hot wages and inflation data pointing to the need to adjust policy rates higher versus the risk of market bumps that would call for more patience.
