Fed's 50 bps rate cut triggers varied reactions on emerging markets

US Fed rate cut: The US Federal Reserve's recent decision to cut its benchmark interest rate by 50 basis points has sparked a range of opinions amongst experts regarding its impact on emerging markets such as India. While some view the rate cut as a potential boost for investment inflows, others are concerned about its effects on equity returns and gold prices.

Surprise Fed rate cut

The Federal Open Market Committee (FOMC) reduced the federal funds rate target range to 4.75-5% from 5.25-5.50%, a cut larger than anticipated. This move follows a prolonged period of holding rates at a high level for over two years.

Sanjeev Agrawal, President of PHDCCI, expressed concerns that this rate cut might result in lower equity returns and an increase in gold prices. Colin Shah, Managing Director of Kama Jewellery, agreed, highlighting that the rate cut could drive gold prices to new highs, reinforcing its status as a safe-haven investment.

On the other hand, some experts anticipate positive outcomes for emerging markets. Rohit Arora, Co-founder and CEO of Biz2Credit and Biz2X, believes that the Fed's rate cut could lead to increased foreign investment in Indian stock markets and higher foreign direct investment (FDI), which would strengthen the rupee and potentially lower domestic interest rates. This would provide the Reserve Bank of India ( RBI ) with more flexibility to adjust its own rates.

RBI rate decision looms

The RBI has maintained its repo rate at 6.50% since February 2023 to manage inflation. The upcoming RBI Monetary Policy Committee meeting from October 7-9 will be critical in deciding any potential rate changes. 

Vishal Goenka, Co-founder of IndiaBonds.com, highlighted that India has so far remained relatively insulated from global rate fluctuations, and with strong economic growth, a rate cut may not be immediately necessary.

Trideep Bhattacharya, President & CIO-Equities at Edelweiss MF, suggested that the deeper-than-expected Fed rate cut and the shift in US economic forecasts could lead to rate reductions in emerging markets, potentially boosting capital flows into these regions.

Vikas V Gupta, CEO & Chief Investment Strategist at OmniScience Capital, highlighted that lower financing costs could attract more investment from Foreign Institutional Investors (FIIs) into emerging markets like India. 

Meanwhile, Deepak Ramaraju, Senior Fund Manager at Shriram AMC, predicted that emerging economies might consider rate cuts, but said that the RBI might wait until December or the fourth quarter of FY 25 before making any moves. He also suggested that while FII flows might initially decline, they could rebound as the US dollar weakens.

(With PTI Inputs)