Expert View | US Fed to cut rates by 25 bps; may trigger temporary rally in Indian market: Amit Goel of Pace 360

The US Federal Reserve is set to announce its new interest rate decision on Wednesday, September 18, after a two-day Federal Open Market Committee (FOMC) meeting. US Fed chair Jerome Powell-led rate-setting panel is widely expected to reduce the benchmark policy rate for the first time in four years.

Headed by Powell, the FOMC will begin deliberations today, i.e., Tuesday, September 17, for the sixth monetary policy meeting for 2024. Powell has expressed confidence in cutting interest rates for the current meeting, saying that inflation was near the US central bank's two per cent target.

Also Read: US Fed policy decision in focus: Did Powell-led FOMC wait too long to cut interest rates? Here's what experts say

“The time has come for policy to adjust," Powell said in his keynote speech at the Fed's annual economic conference in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."

In the last policy meeting, Powell-led FOMC unanimously voted to keep the policy rate at the 23-year high of 5.25 per cent—5.50 per cent. The US central bank has maintained borrowing rates steady for 12 straight months to anchor in high inflation and consistently bring it down toward the two per cent target range.

D-Street experts said the main concern for policymakers has been the labour market, which is more likely to drive policy discussions and decisions in the months ahead. They will also have more data to consider leading up to their November and December meetings. Some analysts also noted that a quarter-point cut might provide a temporary boost. Still, it is unlikely to have the sustained impact to counteract the US economy's multiple challenges.

Also Read: US Fed set to announce first rate cut in four years: How will it impact India’s RBI policy? Experts weigh in

Ahead of the much-awaited US Fed policy decision, Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, a SEBI registered multi-asset PMS and Cat III AIF, said in an interview with Mint's Nikita Prasad that the US Fed is likely to deliver a 25 bps rate cut tomorrow. The policy verdict may also trigger a temporary rally in the Indian market due to improved global risk sentiment. It could also strengthen the Indian rupee and attract foreign investment to India.

Edited excerpts from the interview:

1. Global markets have priced in an interest rate cut by the US Federal Reserve on September 18, which will be the central bank's first policy reduction in four years. What are your key expectations from the US Fed's monetary policy, and what size of rate cut do you foresee at this time?

The US Fed will likely prioritize maintaining economic growth and employment stability while ensuring inflation remains controlled. The main concern for policymakers has been the labour market, which is expected to drive policy discussions and decisions in the coming months. They’ll also have more economic data, like jobs reports and inflation figures, to consider leading up to their November and December meetings.

In the September meeting, the Federal Reserve will likely cut interest rates for the first time since 2020. The Fed’s policy-making Federal Open Market Committee (FOMC) has not changed interest rates since July 2023. The market's primary question is how far and fast the Fed will cut rates. We foresee a 25 basis point (bps) rate cut.

Also Read: US Fed Chair Jackson Hole 2024 Highlights: Powell says ‘time has come’ for Fed to slash interest rates

2.The latest US consumer price index (CPI) data of August was mixed with a slight uptick in underlying inflation even as the annual CPI was at a 43-month low. The data led to Wall Street cutting bets of a 50 bps rate cut. How do you think a 25 bps rate cut by the US Fed will impact India's financial markets?

A 25-bps cut could trigger a temporary rally in Indian markets due to improved global risk sentiment. It might also strengthen the Indian rupee, making imports cheaper but potentially affecting exports negatively. Additionally, this could attract foreign investment to India, boosting stock markets. However, the sustained impact will depend on the RBI’s monetary policy response and broader global cues. The long-term effect will hinge on the global economic outlook and future Fed actions.
 

3.Food inflation, unemployment, and shelter/house accommodation prices are common themes in the US and Indian economies. Despite overall inflation moving near target levels, middle-class families face the brunt daily. Do you think the US and Indian governments have policies to address these issues?

Both the US and Indian governments face challenges in addressing these issues. In the US, policies often focus on broader economic growth, which can indirectly benefit the middle class. The US has various programs to mitigate inflation's impact on middle-class families, including social safety nets and targeted subsidies. The Federal Reserve’s monetary policy also plays a role in influencing inflation and employment rates.

Also Read: RBI vs US Fed: Which central bank will cut interest rates first? Here’s a 5-point analysis

In India, the government has implemented programs like targeted subsidies and social welfare schemes to support lower-income families and efforts to stabilize food prices. However, challenges remain in effectively managing inflation and meeting the needs of middle-class families. Both governments are continuously working on policies to tackle these issues.

4.RBI remains divergent among central banks with an actively disinflationary policy to achieve the four per cent target, even as global banks have entered their rate-cut cycles. How will this impact the RBI policy, and when do you foresee a rate cut in India?

The RBI’s focus on maintaining a four per cent inflation target indicates a cautious approach. It is likely to maintain its accommodative stance for some time. Given the global trend toward rate cuts, the RBI might consider easing its policy stance if inflation remains controlled. 

However, the timing of any rate cut will depend on domestic inflation trends and economic conditions. A rate cut in India could occur later in 2024, provided inflation aligns with the RBI’s target and global conditions support such a move.

Also Read: RBI to remain divergent among central banks, maintain status quo on policy rates till late FY25: SBI Caps

5.Earlier this year, the RBI said emerging market economies like India face currency fluctuations amidst volatile capital flows. What impact will foreign fund outflow have on India's financial markets and economic growth this year?

Foreign fund outflows can lead to the depreciation of the Indian rupee, increased volatility in financial markets, and potentially higher borrowing costs. The impact depends on the severity and duration of the outflows. This could affect economic growth by making imports more expensive and increasing inflationary pressures. However, India’s robust domestic demand and diverse economic base may offer some resilience against these external shocks.

Also Read: US Fed holds key rates elevated at two-decade high, Powell nods to possible September cut; 5 major takeaways
 

6.Amid external triggers such as geopolitical conflicts and the US presidential elections in November, do you think stock markets will generate similar returns in 2024 as last year? Where do you think Sensex and Nifty 50 levels will reach by the end of 2024?

Geopolitical conflicts and the US elections are significant external factors that could introduce volatility in global and Indian markets. The markets will react to these events based on their perceived impact on global economic stability and investment flows.

We expect the Nifty to stay within a range, not falling below 23,500 and potentially reaching as high as 26,000 by the end of 2024. We may witness continued positive performance if domestic economic conditions remain strong and external risks are managed. However, investors should remain cautious of potential volatility.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.