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Come the 18th of September, you'll find most newspapers and TV channels strutting to cover the impact of the <keyword id="19900043" type="General" weightage="20" keywordseo="Fed" source="keywords" meta.keywordsubtype="org" meta.entityname="Fed" meta.hostid="261" meta.entityid="Fed">Fed</keyword>'s potential rate change on Indian stock markets. Policymakers there have held the central bank's interest stable since July last year, within the range of 5.25% to 5.5%, to dash down inflationary pressures gripping the <keyword id="20335130" type="General" weightage="20" keywordseo="US-economy" source="keywords">US economy</keyword>. This much criticised wait-and-watch approach, after the <keyword id="19900043" type="General" weightage="20" keywordseo="Fed" source="keywords" meta.keywordsubtype="org" meta.entityname="Fed" meta.hostid="261" meta.entityid="Fed">Fed</keyword> held the rates stable in its most recent meeting in July, seems to be yielding some fruits now. US consumer price index (<keyword id="20468215" type="General" weightage="20" keywordseo="CPI" source="keywords">CPI</keyword>) slowed down to 2.5% in August, down from 2.9% in July. With inflationary pressures approaching the 2% target mandated by Fed, experts were hoping of a 50-basis point reduction in interest rates this time. However, employment data released by the US Bureau of Labor Statistics this month painted a less than rosy picture. Little has changed in August for unemployment rates and numbers, which stood at 4.2% and 7.1 million respectively. If anything, the numbers were elevated from year-ago period, when jobless rate was 3.8% and the number of unemployed people stood at 6.3 million. Experts now believe a 25-basis point reduction in interest rates is imminent, since some positive changes were seen on the employment front. The total number of nonfarm payroll employment jumped by 1,42,000 in August, but still stayed well below the average monthly gain of 2,02,000 Says Raj Patel, CMO at MintCFD, a trading platform, "A 25 bps could show muted results from the market, however, a major rate cut in the magnitude of 50 bps could generate negative reactions, since it might show that the Fed is signaling major concerns about the economic outbreak. Indicators such as the retail sales, consumer confidence index, and services PMI are on a positive note. The Fed is focusing more on employment as the average US unemployment rate over the last three months, up to July, has increased by 0.5% as compared to the lowest point in the past year". But why are <keyword id="19991358" type="General" weightage="20" keywordseo="Indian-markets" source="keywords">Indian markets</keyword> always so jittery about interest rate changes in the US? And should you be worried? We decode it for you. Rate hike and cuts impacts foreign investments Generally, large institutional investors borrow funds from the US and other developed economies, and invest in India, China and other emerging countries, anticipating economic growth, and hence, potential for increased returns in the times to come. This influx of funds is crucial for growing countries, since they use it to develop their infrastructure, which will in turn, bolster their economic growth. The cost of raising funds from countries like US is relatively cheaper, given the interest rates here are not very high. On the other hand, borrowing costs in emerging countries like India are higher. At present, India's repo, or borrowing rate, at which banks borrow funds from <keyword id="19899808" type="General" weightage="20" keywordseo="rbi" source="keywords">RBI</keyword>, stands at 6.5%. While this may seem like a trivial difference, it decides the fate of trillions of dollars of investments. Even a 25-basis point hike or cut could bring about a significant difference when such huge sums are involved. So, when Fed decides to hold the interest rate stable, or hike the same, it makes borrowing to invest in international markets expensive for investors. At the same time, it makes investing in US treasury bonds more lucrative and economically favorable, since investors are set to earn higher returns from them. As a result, investors rush to withdraw their money from other economies, and invest it in their own country i.e. the US. For instance, in January 2024, Fed decides to keep the interest rate stable between the range of 5.25% to 5.5%. As a result, <keyword id="19991358" type="General" weightage="20" keywordseo="Indian-markets" source="keywords">Indian markets</keyword> saw an outflux of foreign investment that month, with investors withdrawing Rs 6,593 crores from markets. Between March 2022 and July 2023, the Fed hiked interest rates about 11 times. As a result, during FY23, foreign investors remained net sellers, liquidating Rs 40,936 crore from Indian markets. When Fed decides to slash rates, which makes borrowing cheaper, investors are encouraged to raise more funds, and invest more heavily in developing countries. This anticipation of funds stimulate the stock markets in a positive manner, which is why it is beneficial situation for countries like India, which, eventually, see greater investments from US and other economies. China and India are generally seen as favorite destinations for investors. With the Chinese economy in doldrums at the moment, India can expect higher foreign direct investments (FDI) in the months to come. Just yesterday, China cut down interest rates on about $5 trillion worth of its outstanding loans, in a bid to spur consumption and borrowing in the economy. But do not expect any immediate boosts in the equity market, as many experts caution. There have been many instances in the past where rate cuts did not boost equities immediately. This is because rate cuts are not the sole factor driving investments. If the corporates report slowed earnings, or weak growth, investors are bound to be discouraged from investing in the country. Your best bet is to invest in sectors which have traditionally withstood market downturns, like insurance, telecoms and pharmaceuticals, and reduce exposure to sectors which are significantly affected by market cycles (think PSUs, auto, metals etc).

With Fed rate cuts imminent, what can you expect from the Indian markets next week?

The Reserve Bank of India (<keyword id="19899808" type="General" weightage="20" keywordseo="RBI" source="keywords">RBI</keyword>) has started its three-day monetary policy committee (MPC) meeting in Mumbai on Tuesday. The meeting will conclude on Thursday, when the RBI will announce its decisions on the <keyword id="20094323" type="General" weightage="100" keywordseo="repo-rate" source="keywords">repo rate</keyword> and other matters. The repo rate, which has been maintained at 6.5 per cent since it was last increased in February 2023, is widely expected by experts to remain unchanged for the ninth consecutive bi-monthly policy review. Experts highlight that <keyword id="19895000" type="General" weightage="20" keywordseo="inflation" source="keywords">inflation</keyword> in India remains above the RBI's target range, making it unlikely that the central bank will implement policy cuts until inflation reaches the target of 4 per cent. However, the expert added that the RBI may consider rate cuts in the October meeting. Banking expert Ashutosh Khajuria commented: "Monetary Policy Committee (MPC) may continue to hold the policy signalling Repo rate and wait for <keyword id="19979707" type="General" weightage="20" keywordseo="Consumer-Price-Inflation" source="keywords">Consumer Price Inflation</keyword> to decisively fall below 4 per cent, the target rate. For the present, the continuation of the current stance is widely expected. MPC in India may change the stance and rate action by the beginning of the second half of the year in their October meeting at the earliest." The experts also noted that while <keyword id="20196112" type="General" weightage="20" keywordseo="core-inflation" source="keywords">core inflation</keyword> has been contained and commodity prices, particularly metals, have dropped by 15-20 per cent from their 2024 peak, food inflation remains a concern and needs to be closely monitored to ensure stability in overall CPI numbers. The Managing Director of a major bank, who preferred not to be named, told ANI: "During the last policy meeting we could see some voting in favour of a <keyword id="19920203" type="General" weightage="20" keywordseo="rate-cut" source="keywords">rate cut</keyword>. At the same time, we could see The Reserve Bank of India's (RBI) Governor Shaktikanta Das on July 11 said it is too early to talk on the interest rate cut due to the uncertain economic environment and inflation remaining close to five per cent. Considering both, our expectation is that the rate cut cycle may start from the next meeting and no change in <keyword id="19950650" type="General" weightage="20" keywordseo="interest-rates" source="keywords">interest rates</keyword> this time." RBI Governor Shaktikanta Das had also emphasised in the last policy briefing that food inflation is still a concern and that the regulator is not in a hurry to make a decision on rate cuts. A recent report by the State Bank of India (SBI) also noted that Consumer Price Inflation in India is expected to remain around 5 per cent for the financial year 2024-25, except for the months of September and October.

Repo rate cut unlikely in ongoing MPC meeting, but RBI may change it during October policy review: Experts

The Reserve Bank of India (RBI) may begin lowering <keyword id="19950650" type="General" weightage="20" keywordseo="interest-rates" source="keywords">interest rates</keyword> around October, provided that external factors like weather conditions and international commodity prices do not cause any disruptions, the credit rating agency, Crisil said in its report. The credit rating agency further anticipated that it expects "two rate cuts this fiscal." It said that the decision of the <keyword id="19913109" type="General" weightage="20" keywordseo="Monetary-Policy-Committee" source="keywords">Monetary Policy Committee</keyword> (MPC) decision to hold rates in its recent announcement was due to the elevated <keyword id="19999654" type="General" weightage="20" keywordseo="food-inflation" source="keywords">food inflation</keyword>. The climate conditions such as weather events are frequently changing and they need to be monitored. Going ahead, it anticipated that the macroeconomic environment would be better, creating a background for a rate cut. "The food challenge to a rate cut is expected to ease as agriculture prospects look better than last year. The monsoon has been above normal (7 per cent above the long period average as of August 7), and sowing has picked up across major foodgrains. As agriculture prospects become clearer by September, we expect it to pave the way for a rate cut," the S&amp;P's arm added in its report. In a move reflecting its cautious approach amid ongoing economic uncertainties, the RBI has decided to keep the <keyword id="20094323" type="General" weightage="20" keywordseo="repo-rate" source="keywords">repo rate</keyword> unchanged at 6.5 per cent. The decision to keep the repo rate steady comes amidst persistent concerns about <keyword id="19895000" type="General" weightage="20" keywordseo="inflation" source="keywords">inflation</keyword>, which remains above the RBI's target range. The central bank's commitment to bringing inflation down to its 4 per cent target continues to face challenges due to ongoing food inflation and other economic factors. Noting a likely uptick in core inflation, the report added that factors such as international freight costs, geopolitical risks to crude oil prices, and hikes in domestic telecom tariffs could affect this indicator. Anticipating the growth, it added, "The pace of growth of the economy is expected to ease this year, with lower fiscal support as the government pursues <keyword id="20101140" type="General" weightage="20" keywordseo="fiscal-consolidation" source="keywords">fiscal consolidation</keyword>." Announcing the MPC's decision on August 8, RBI Governor Shaktikanta Das expected the real Gross Domestic Product (GDP) growth of 7.2 per cent for the fiscal year 2024-25. Governor Das emphasized that the RBI remains vigilant regarding inflationary pressures and will take necessary actions to maintain price stability while supporting the country's economic recovery. The MPC's decision reflects a balanced approach, aiming to control inflation without stifling growth. The adjustments in repo rate have a direct effect on <keyword id="19900794" type="General" weightage="20" keywordseo="economic-growth" source="keywords">economic growth</keyword> and job creation. The lower interest rates tend to stimulate economic growth by making borrowing cheaper for businesses.

RBI expected to begin rate cuts in October, with two reductions this fiscal: Crisil

New Delhi: While the <keyword id="20199673" type="General" weightage="20" keywordseo="moderation" source="keywords">moderation</keyword> in <keyword id="20468215" type="General" weightage="20" keywordseo="CPI" source="keywords">CPI</keyword> <keyword id="19895000" type="General" weightage="100" keywordseo="inflation" source="keywords">inflation</keyword> is a welcome development, experts caution that the road ahead could be bumpy. The sequential momentum in <keyword id="19960157" type="General" weightage="20" keywordseo="food-prices" source="keywords">food prices</keyword> remains strong, with a 2.5 per cent month-on-month increase in prices, higher than the average sequential growth, indicating that inflationary pressures may persist. The uneven distribution of monsoon rainfall and the potential for excess rainfall in the coming months pose additional risks to food prices. RajSinha, Chief Economist at CareEdge, noted, "Despite the moderation in the inflation of the food and beverage basket when compared to last year, the sequential momentum remains strong, with a 2.5 per cent M-o-M increase in prices, higher than an average sequential grow." Dharmakirti Joshi, Chief Economist at CRISIL, highlighted the impact of the high-base effect, stating, While the high-base effect -- along with sequential monthly movements -- was supportive of food inflation, it had an adverse bearing on core inflation. The big worry now is food prices continue to be elevated with the on-month rise slightly higher than usual for July. "The good part is monsoon and sowing have been progressing well and the expectation is that the arrival of fresh supplies in the market should over the next few months curb the food price rise. Overall, though, we expect inflation to ease and average 4.5 per cent this fiscal mostly due to softer food prices. This should allow the <keyword id="19899808" type="General" weightage="20" keywordseo="RBI" source="keywords">RBI</keyword> to begin cutting earliest by October", Joshi added. Raghvendra Nath, Managing Director of Ladderup Wealth Management, expressed optimism regarding the CPI data, stating, "This decline is primarily attributed to a reduction in the Consumer Food Price Index, which fell from 9.36 per cent in June to 5.42 per cent in July. This improvement should offer reassurance to the <keyword id="19899810" type="General" weightage="20" keywordseo="reserve-bank-of-india" source="keywords">Reserve Bank of India</keyword> (RBI), which has indicated that <keyword id="19920341" type="General" weightage="20" keywordseo="rate-cuts" source="keywords">rate cuts</keyword> will occur only when inflation sustainably aligns with its 4 per cent target. He added, "Positive expectations for the monsoon and adequate buffer stocks support the continued downward trend of CPI. However, any substantial rise in crude oil prices due to the ongoing geopolitical crisis could adversely affect inflation and the broader economy." Sanjeev Agrawal, President of the PHD Chamber of Commerce and Industry, also commended the decline in CPI inflation, stating, "It is highly appreciable that the CPI inflation has exhibited a decline in the year-on-year inflation rate at 3.5 per cent for the month of July 2024 from 5.08 per cent in June 2024." He added, "The food and beverages inflation eased sharply from 8.4 per cent in June 2024 to 5.06 per cent in July 2024 and fuel and light inflation from -3.7 per cent in June 2024 to -5.4 per cent in July 2024, are the main drivers of the softening inflation trajectory." India's Consumer Price Index (CPI) inflation eased significantly to 3.54 per cent in July 2024, marking its lowest level in nearly five years and a sharp drop from 5.08 per cent in June. This decline, which brought inflation below the Reserve Bank of India's (RBI) medium-term target of 4 per cent for the first time since 2019, has been largely attributed to a favourable base effect and a dramatic reduction in <keyword id="20621131" type="General" weightage="20" keywordseo="vegetable-prices" source="keywords">vegetable prices</keyword>. The primary driver behind this sharp moderation was the steep fall in vegetable inflation, which plummeted from 29.3 per cent in June to 6.8 per cent in July. The Consumer Food Price Index (CFPI) also saw a significant reduction, falling from 9.36 per cent in June to 5.42 per cent in July, contributing to the overall easing of CPI inflation. (ANI)

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With Fed rate cuts imminent, what can you expect from the Indian markets next week?

Ira Alok Puranik

Repo rate cut unlikely in ongoing MPC meeting, but RBI may change it during October policy review: Experts

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RBI expected to begin rate cuts in October, with two reductions this fiscal: Crisil

ANI

Experts welcome moderation of inflation in July, by warns of continued inflationary pressure ahead

ANI

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