How US Fed’s rate cut will impact India & will the RBI follow suit

Summary

In this episode, the host discusses the U.S. Federal Reserve's 50 basis point rate cut and its potential impact on India. Experts debate whether a 50 or 25 basis point cut was appropriate, given cooling inflation and the labor market in the U.S. The discussion explores how this rate cut could lead to capital inflows into India, strengthening the rupee, and influencing RBI's upcoming policy decisions. The key focus is on whether India's central bank will follow suit by cutting rates, and the implications of such a move on the broader economy.

Takeaways

• 📉 The US Federal Reserve cut interest rates by 50 basis points, which is larger than expected.
• 📊 There were two views on the rate cut: some expected a 25 basis point cut to remain cautious, while others believed 50 was necessary due to cooling labor markets and decreased inflation.
• 📈 Markets, both in the US and India, anticipated the 50 basis point cut and have seen positive returns as a result.
• 🛠 The Fed's goal with the rate cut is to avoid falling behind inflation trends, similar to the criticism they received during the 2022 tightening cycle.
• 🧮 Inflation in the US has dropped from 9% in 2022 to around 2.5%, leading the Fed to believe it's time for a significant rate cut.
• 💼 The US labor market has cooled slightly but is not in an alarming state, with the GDP growing at 3% and no signs of recession.
• 💵 For India, the rate cut is expected to bring an inflow of foreign capital, making Indian equities and bonds more attractive.
• 📊 The Reserve Bank of India (RBI) may not immediately follow the Fed's rate cut, as domestic inflation and growth factors haven't changed significantly.
• 💸 If the RBI does cut rates, it may negate the capital inflows and dollar strength in India, depending on their policy interventions.
• 🏦 The RBI's decisions on interest rates are typically influenced by domestic factors but often mirror US Federal Reserve trends.

Q & A

What was the main news topic discussed in the video?

The main news topic was the 50 basis point rate cut by the US Federal Reserve and its potential impact on international economics, especially on India.

Was the 50 basis point rate cut by the US Federal Reserve a surprise?

Yes, there was some debate about the size of the rate cut. While some analysts expected a 25 basis point cut, others anticipated the 50 basis point cut due to the cooling labor market and falling inflation in the US.

Why did the Federal Reserve opt for a 50 basis point rate cut instead of a smaller cut?

The Federal Reserve opted for the larger 50 basis point cut to avoid falling behind the curve in managing risks. They wanted to help borrowers facing high borrowing costs and preemptively act before a potential slowdown in the labor market becomes more serious.

How has the US economy changed since the Federal Reserve’s rate hikes in 2022?

Since the 2022 rate hikes, inflation in the US has cooled significantly, and the labor market, while showing signs of easing, remains relatively strong. Additionally, US GDP has grown, with a recent 3% growth rate from April to June 2024.

What is the expected impact of the US rate cut on India?

The rate cut is expected to lead to greater inflows of foreign capital into India, as the interest rate differential between the US and India has widened, making Indian assets more attractive to foreign investors.

How might the US rate cut affect the Indian rupee?

With increased foreign capital inflows, the rupee is expected to strengthen. However, this will depend on whether the Reserve Bank of India (RBI) allows the rupee to appreciate or intervenes to manage the exchange rate.

Will the RBI likely follow the US Fed's lead and cut interest rates?

It's uncertain whether the RBI will cut interest rates immediately. While domestic factors such as inflation and growth haven’t changed significantly, there is pressure to at least change the monetary policy stance from 'withdrawal of accommodation' to 'neutral.'

What are the challenges for the RBI if it decides to cut rates?

One challenge is the sluggish deposit growth in Indian banks. If the RBI cuts rates, banks might struggle to transmit the cut into deposit rates while still competing for deposits to finance credit growth.

How has bank credit in India performed, despite high interest rates?

Despite high interest rates, bank credit growth, especially retail credit and unsecured lending, has been strong. This indicates that high rates haven't significantly dampened borrowing demand.

What are the broader global implications of the US Federal Reserve's rate cut?

Globally, emerging markets may see more capital inflows as investors seek higher returns compared to the US. Other central banks, particularly in emerging markets, might follow the Fed’s lead in adjusting interest rates depending on their domestic economic conditions.