Virendra Pandit
New Delhi: The impact of the US Federal Reserve’s rate cut might be muted in India as much of it was already priced in, Chief Economic Advisor V Anantha Nageswaran said on Thursday.
The US Federal Open Market Committee on Wednesday voted to cut the federal funds rate target range by 50 basis points from 5.25-5.50 percent to 4.75-5.00 percent, signaling further cuts in 2024.
The Fed lowered its benchmark interest rate by a half percentage in an aggressive start to a policy shift aimed at bolstering the US labor market. It said that inflation is nearing its 2 percent target but noted ongoing concerns about elevated inflation and a weakening labor market.
On Thursday, Indian stock markets reacted positively to the US Fed rate cut, as the benchmark index Sensex surged 236 points to close at 83,184 while Nifty increased 38 points to close at 25,415.
Addressing the Deloitte Government Summit 2024 in the national capital, Dr. Nageswaran said the Indian stock market is already attracting investor interest and the overall rate cut is a positive sign for emerging markets.
Hinting at the ongoing geopolitical conflicts amid a slowing global economy, he remarked: “Stock markets had moved ahead of the rate cut… It is difficult to predict whether the rate cut, per se, will be a fillip to the global economy because other things are not constant.”
“If everything else stays constant, then the rate cut by itself should have a positive impact because it lowers the dollar cost of capital, and increases dollar liquidity in the world,” Dr. Nageswaran said.
Many countries, including developing countries, will be relieved to see dollar liquidity since they have been affected by the tightening interest rates in the US between 2022 and 2023, he added.
Economic Affairs Secretary Ajay Seth said the US Fed rate cut would not have a significant impact on foreign inflows into India.
“It is a positive for the global economy, including the Indian economy. It is a 50 basis point cut from a high level. I don’t see that making any significant impact on inflows. We have to see where the US interest rates levels are, and how other economies’ markets behave,” Seth said.
The US central bank had kept interest rates at an over two-decade high for 14 months. The Fed’s announcements come days before the Reserve Bank of India’s Monetary Policy Committee (MPC) meeting scheduled on October 7-9.
Asked whether the RBI would start to cut interest rates, Seth said that it was for the MPC to decide at an appropriate time.
“Their decision is based on what is good for the Indian economy. You should not read too much into the event which happened yesterday,” he said.
The RBI has maintained the status quo on the rates since February 2023.