US Fed rate cut prickly, cautious RBI may not trail
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Shivaji Sarkar
The US Federal Reserve rate cut after four years may not be beneficial to India, which is assessing concomitant risks, with possible loss in dollar value, of unfathomed trends in the global market.
With apprehensions of spike in India’s domestic inflation rate to at least around 5 percent by October, the US Fed 50 basis points (0.5 percent) cut may not force Reserve Bank of India (RBI) to follow suit, a demand that the industry has been sounding for some time. The RBI remains cautious and is likely to watch the world volatility. The booming stock would not impact the RBI decision making process. The level of high returns may lead to a severe bust.
Federal Reserve's recent 50 basis point (bps) rate cut may make the Reserve Bank of India (RBI) consider a similar move. However, a rate cut from the RBI is unlikely this year, with a potential announcement expected only in February 2025, according to a SBI Research report.
In the US, there are views that if the economy is faltering, forcing the Fed to lower rates quickly, that can be a headwind to the stock market. A gentle return to a more normal level of rates — at least in the context of the past few decades — is less likely to crimp corporate profits in the way that an economic downturn could. That is the corporate interest. The stock market, however, is not an indicator of any economy anywhere.
Rupee appreciation could create more problem for exports in a competitive market. In dollar terms, the country would accrue less for each of its exports. Another fall out is the value of forex reserves in held dollar.
India, as per Foreign Secretary Ajeet Seth is largely insulated from rest of the world rate movements for now and the tremendous rally in risk assets plus projected econo- mic growth with inflationary situation under check. The RBI Monetary Policy Committee meets on October 7-8. It would take a view of the global changes but rate cut may remain elusive for now. Most likely inflation scenario is different in India. The present US, inflation around 2 percent, from nine percent, is not considered low.
The industry and business pressure forced the Fed to settle for it.
This signifies a reality that governments across the world are not acting independently. The multi-national businesses have become powerful. It is an indicator that India, whether the situation deserves or not, may not be able to resist for long. Most observers feel before the presentation of the union budget, a rate cut is possible.
An immediate advantage is noticed in the stock market. India and elsewhere rate cut is taken as “positive” and share prices have risen. Bloomberg and other financial institutions have taken it as “good” move though they are unable to explain the rate cut and share prices linkage. The stock market acts on emotions and speculation. Indian markets despite being tizzy, Bombay Stock market Sensex and NSE’s Nifty index are jumping ahead. The crux of the market is that both indices have select few scrip to decide the indices. If only a fewer of the shares do well, it shoots up.
All else equal, lower rates are good for the stock market. When investors gauge the value of a stock, they tend to come up with a higher figure when interest rates fall because of a common valuation principle known as discounting, in which a company’s future cash flows and costs become more attractive under low-rate conditions.
If the economy is faltering, forcing lowering of rates quickly, can be a headwind to the stock market. A gentle return to a more normal level of rates — at least in the context of the past few decades — is less likely to crimp corporate profits in the way that an economic downturn could. The corporate, however, are apparent- ly pressurising the various govts bid what they say.
India's retail inflation rate has eased to 3.65 percent year-on-year in August 2024, supposedly being a near five-year low, is not that low either. The RBI dilemma is over likely spike in prices to 5 percent or more by October end. Vegetable, fruit and horticul- ture, pulses, edible oil, foodgrain and textile prices are concern. Of late, cement and steel prices also have appreciated jacking up real estate costs. In such situation of uncertainties, it is not easy for the RBI to take a call.
Lower interest rates are not a panacea. It supposedly lowers the borrowing cost but only from a prospective date. If the RBI cuts rates, it makes credit less expensive for consumers and corporations alike. The cheaper debt means companies can spend more to expand, just as consumers might be able to afford bigger homes with lower mortgage rates.
It has its complications. The interplay between interest rates and the business world is unpredictable. Lower rates necessarily do not bolster the economy, but for companies and their investors, lower rates do not always carry unalloyed positive effects. The banking sector takes the worse cuts. Lowering interest rates beyond a point have been found to be counter-productive. The lower rates do not bring down bank transaction or operational costs. The worst was observed during 2007-08 meltdown.
The New York Times observes the Fed began lowering rates in September 2007, in the early stages of a financial crisis. Over the next 12 months, the S&P 500 fell more than 20 percent. But cuts to rates in 1995 and 1998 came alongside a strong rally for stocks.
So either for the US or India, rate cut is a critical decision. India observed that “incentivising” corporate in 2008-09 led to a severe public sector banking crisis. The NPA rose to over Rs 50 lakh crore and public banks had to be reorganised through mergers and severe hair-cut. Since the Indian banking system has gone through many crises.
It is prudent for the RBI to go slow. Its primary objective should not be the corporate but the depositors, who are failing to replenish dwindling bank coffers. As of now inflation is the key issue. Raising rates would be more desirable and beneficial for the economy as also the depositors than lowering it in the next six months. The country expects RBI to be on the right track than swayed by vested interests.
The US Federal Reserve rate cut after four years may not be beneficial to India, which is assessing concomitant risks, with possible loss in dollar value, of unfathomed trends in the global market.
With apprehensions of spike in India’s domestic inflation rate to at least around 5 percent by October, the US Fed 50 basis points (0.5 percent) cut may not force Reserve Bank of India (RBI) to follow suit, a demand that the industry has been sounding for some time. The RBI remains cautious and is likely to watch the world volatility. The booming stock would not impact the RBI decision making process. The level of high returns may lead to a severe bust.
Federal Reserve's recent 50 basis point (bps) rate cut may make the Reserve Bank of India (RBI) consider a similar move. However, a rate cut from the RBI is unlikely this year, with a potential announcement expected only in February 2025, according to a SBI Research report.
In the US, there are views that if the economy is faltering, forcing the Fed to lower rates quickly, that can be a headwind to the stock market. A gentle return to a more normal level of rates — at least in the context of the past few decades — is less likely to crimp corporate profits in the way that an economic downturn could. That is the corporate interest. The stock market, however, is not an indicator of any economy anywhere.
Rupee appreciation could create more problem for exports in a competitive market. In dollar terms, the country would accrue less for each of its exports. Another fall out is the value of forex reserves in held dollar.
India, as per Foreign Secretary Ajeet Seth is largely insulated from rest of the world rate movements for now and the tremendous rally in risk assets plus projected econo- mic growth with inflationary situation under check. The RBI Monetary Policy Committee meets on October 7-8. It would take a view of the global changes but rate cut may remain elusive for now. Most likely inflation scenario is different in India. The present US, inflation around 2 percent, from nine percent, is not considered low.
The industry and business pressure forced the Fed to settle for it.
This signifies a reality that governments across the world are not acting independently. The multi-national businesses have become powerful. It is an indicator that India, whether the situation deserves or not, may not be able to resist for long. Most observers feel before the presentation of the union budget, a rate cut is possible.
An immediate advantage is noticed in the stock market. India and elsewhere rate cut is taken as “positive” and share prices have risen. Bloomberg and other financial institutions have taken it as “good” move though they are unable to explain the rate cut and share prices linkage. The stock market acts on emotions and speculation. Indian markets despite being tizzy, Bombay Stock market Sensex and NSE’s Nifty index are jumping ahead. The crux of the market is that both indices have select few scrip to decide the indices. If only a fewer of the shares do well, it shoots up.
All else equal, lower rates are good for the stock market. When investors gauge the value of a stock, they tend to come up with a higher figure when interest rates fall because of a common valuation principle known as discounting, in which a company’s future cash flows and costs become more attractive under low-rate conditions.
If the economy is faltering, forcing lowering of rates quickly, can be a headwind to the stock market. A gentle return to a more normal level of rates — at least in the context of the past few decades — is less likely to crimp corporate profits in the way that an economic downturn could. The corporate, however, are apparent- ly pressurising the various govts bid what they say.
India's retail inflation rate has eased to 3.65 percent year-on-year in August 2024, supposedly being a near five-year low, is not that low either. The RBI dilemma is over likely spike in prices to 5 percent or more by October end. Vegetable, fruit and horticul- ture, pulses, edible oil, foodgrain and textile prices are concern. Of late, cement and steel prices also have appreciated jacking up real estate costs. In such situation of uncertainties, it is not easy for the RBI to take a call.
Lower interest rates are not a panacea. It supposedly lowers the borrowing cost but only from a prospective date. If the RBI cuts rates, it makes credit less expensive for consumers and corporations alike. The cheaper debt means companies can spend more to expand, just as consumers might be able to afford bigger homes with lower mortgage rates.
It has its complications. The interplay between interest rates and the business world is unpredictable. Lower rates necessarily do not bolster the economy, but for companies and their investors, lower rates do not always carry unalloyed positive effects. The banking sector takes the worse cuts. Lowering interest rates beyond a point have been found to be counter-productive. The lower rates do not bring down bank transaction or operational costs. The worst was observed during 2007-08 meltdown.
The New York Times observes the Fed began lowering rates in September 2007, in the early stages of a financial crisis. Over the next 12 months, the S&P 500 fell more than 20 percent. But cuts to rates in 1995 and 1998 came alongside a strong rally for stocks.
So either for the US or India, rate cut is a critical decision. India observed that “incentivising” corporate in 2008-09 led to a severe public sector banking crisis. The NPA rose to over Rs 50 lakh crore and public banks had to be reorganised through mergers and severe hair-cut. Since the Indian banking system has gone through many crises.
It is prudent for the RBI to go slow. Its primary objective should not be the corporate but the depositors, who are failing to replenish dwindling bank coffers. As of now inflation is the key issue. Raising rates would be more desirable and beneficial for the economy as also the depositors than lowering it in the next six months. The country expects RBI to be on the right track than swayed by vested interests.