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

US Federal Reserve Chair Jerome Powell expressed confidence in cutting interest rates for the first time in four years, saying that inflation was near the US central bank's two per cent target. This comes as India's Reserve Bank of India (RBI) is focused on withdrawal on accommodation, and the Monetary Policy Committee's (MPC) stance continues to be disinflationary until a durable alignment of headline inflation with the target is achieved.

“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."

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

Meanwhile, the RBI's rate-setting panel believes that food prices remain elevated, which may adversely affect core inflation. According to RBI Governor Shaktikanta Das, food inflation pressures are showing little signs of abatement in the near term, and monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components.

US Fed chair Powell on upcoming rate cuts

Federal Reserve chair Jerome Powell said Friday that the "time has come" for the United States to start cutting interest rates. He added that his "confidence has grown" that the battle against inflation is on track.

"The time has come for policy to adjust," he said in a keynote speech at the Jackson Hole Economic Symposium in the US state of Wyoming, according to prepared remarks, adding: "The direction of travel is clear."

His reference to multiple rate cuts was the only hint that a series of reductions is likely, as economists have forecast. Powell emphasized that inflation after the worst price spike in four decades inflicted pain on millions of households, appears largely under control.

According to the Fed’s preferred measure, inflation fell to 2.5 per cent last month, far below its peak of 7.1 per cent two years ago and only slightly above the central bank's two per cent target level.

Some Fed officials said a half-point Fed rate cut in September would become more likely if there were signs of a further slowdown in hiring. The next jobs report will be issued on September 6. In the last policy decision, Powell said if US inflation continues to fall, “a reduction in our policy rate could be on the table" when the Fed next meets in September.

RBI MPC Stance

The RBI at its last bi-monthly MPC meeting decided to keep the benchmark interest rate (repo rate) unchanged at 6.5 per cent citing inflationary concerns. However, MPC members Dr. Ashima Goyal and Prof. Jayanth R. Varma voted to reduce the repo rate by 25 basis points and change the stance to neutral. 

The remaining four members voted to maintain the status quo on the policy rate for the ninth consecutive time. According to RBI Deputy Governor Dr. Michael Debabrata Patra, the remit of RBI's monetary policy is to adjust demand conditions to the state of supply because the accumulation of price pressures threatens the outlook for both inflation and growth.

‘’This is critical for the ‘last mile of disinflation’ and anchoring inflation expectations. Food inflation may soften due to good monsoons, steady improvement in kharif sowing, rising reservoir levels, and a likely favourable rabi season output,'' said the RBI Governor.

‘’At such a crucial juncture, steady growth impulses allow monetary policy to unambiguously focus on supporting a sustained descent of inflation to the target. The best contribution monetary policy can make for sustainable growth is maintaining price stability,'' added Das.

Also Read: RBI MPC Minutes: Growth impulses allow policy to focus on disinflation, food inflation sticky to core; 5 key highlights

Experts on RBI policy stance amid US Fed's rate cut signals

D-Street analysts said that the likelihood of the Federal Reserve opting for a substantial 50-basis point rate cut in September hinges on the central bank's assessment of the employment and inflation balance leading up to the meeting. Although indicators suggest a potential rate decrease, the odds of such a significant cut are still uncertain. 

‘’The strongest tail wind comes from the expected rate cuts by the Fed which will spill over to other central banks including the RBI. The Indian economy now needs monetary stimulus through rate cuts and this is likely in the next policy meeting,'' said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Market experts also say the recent shift in foreign investors' stance towards the domestic market and the anticipation that the RBI will align with the Fed’s actions are expected to foster a positive outlook for the Indian stock market in the near term.

Also Read: US Fed rate cut: Should we expect strong FPI inflows? How it may impact the Indian stock market?

‘’Currently, traders estimate a 38 per cent chance of a 50-basis point reduction, up from an earlier expectation of 33 per cent, while a 25-basis point cut has a 62 per cent probability. In response to a potential Fed rate cut, Indian stocks that may benefit include those in the IT, BFSI (Banking, Financial Services, and Insurance), Auto, and Realty sectors,'' said Palka Arora Chopra, Director of Master Capital Services Ltd.

According to Chopra, a Fed rate reduction typically weakens the US dollar, increases liquidity, and lowers borrowing costs, positively impacting these sectors. ‘’The rate cuts will be welcomed positively by the Indian market because the RBI is following the US Fed's lead when it comes to interest rates, and their announcements will spur additional rate cuts in India, which will enhance liquidity, attract capital inflows, and strengthen the value of the rupee,'' added Chopra.
 

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.