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US central bank expected to cut interest rates –Impact Indian Market

US Central Bank Expected To Cut Interest Rates – How It Will Impact Indian Market

Despite Uncertainty Around The U.S. Economic Outlook And Disagreements Over The Direction Of Future Monetary Policy, The Federal Reserve Is Still Widely Expected To Cut Interest Rates To A Range Of 1.75% To 2% On Wednesday

While Positive Trade News Helped Boost The Market Near Record Highs Last Week, Stocks Fell Again After A Weekend Attack On Saudi Arabian Oil Facilities Caused A Spike In Global Oil Prices. A Great Deal Of Investor Uncertainty Remains, Primarily Over Mixed U.S. Economic Data (Manufacturing Is Contracting And Inflation Remains Low Even As Consumer Spending And Employment Levels Stay Strong), Ongoing Geopolitical Risks Like The Trade War With China, And The Yield Curve. All Eyes Will Be On The Fed As The Market Looks For Guidance.

The Central Bank In July Cited Signs Of A Global Slowdown, Simmering US-China Trade Tensions And A Desire To Boost Too-Low Inflation As It Lowered Borrowing Costs.

Markets Are Pricing In A Near 90 Per Cent Probability That The Fed Will Shave Another Quarter Point From Its Current Overnight Lending Rate Of 2.00 Per Cent To 2.25 Per Cent, According To The CME Group’s Fed Watch Tool. There Is A Roughly 65 Per Cent Probability That The Fed Makes At Least One More Quarter-Point Cut By The End .

A Rate Cut On Wednesday Would Lower The Fed’s Target Policy Rate To A Range Of Between 1.75 Per Cent And 2.00 Per Cent And Dovetail With Moves By Central Banks Around The World To Ease Monetary Policy To Offset The Impact Of A US-China Trade War And Other Risks To The Global Economy.

From World Bond Markets To US President Donald Trump, However, The More Consequential Reaction May Come In Response To How The Fed Describes Its Latest Policy Decision, The Expectations It Sets For Possible Rate Cuts Later This Year And In 2020, And Whether The Central Bank Shifts Gears And Begins To Again Expand Its Asset Holdings.

 

How The Rate Cut Will Impact Global Market

  • The Fed’s 180-degree pivot from tightening monetary policy last year to lowering rates this summer helped push the stock market to record highs this year.
  • Reaction to any further rate cuts from the Fed will depend on whether investors believe the US economy is headed into a recession.
  • Stock markets tend to rise after “insurance” cuts from the Fed, or periods when officials lower rates to address economic concerns but the economy is not in a recession.
  • Stock markets could fare well in a scenario where the Fed cuts rates for the second time in an “insurance” cycle and avoids a recession.
  • The Dow Jones Industrial Average has typically risen an average of 20 per cent one year after a second rate cut during such an easing cycle, according to Ned Davis Research.
  • Stock market performance can falter if there is an economic downturn

Impact On The Indian Market

  • Market experts think that the rate cut will be a comforting point for the Indian market as it is likely to result into more fund flow to the Indian equities and debt.
  • If rate cut happens, then dollar would correct that would minimize the downside for our currency. At the same time, it would also minimize outflow from FPIs
  • Another positive is that it will give cues to the Indian central bank for deciding the trajectory of rates.
  • Fed rate cut will give us comfort in terms of the kind of quantum of rate cuts which we can look to do,

 

But, What If The Us Fed Goes Against The Widespread Expectations?

It Would Disappoint The Equity Markets Around The World, As Well As Dollar Strengthening Further Against Other Currencies

It Will Be More Detrimental At A Time When The Country Is Facing A Double Whammy In Terms Of Rising Crude Prices And Fall In Indian Rupee.

However, Analysts Highlight That, Even Though The Fed Rate Cut Is Important For The Market, Domestic Factors Will Remain The Main Trigger That Will Decide The Course Of The Foreign Fund Flow.

Earlier The Indian Market Was Closely Looking At The US Fed But Now It Has Changed. The Market Is Looking More Inward Now. Domestic Factors Are More Important Now Than The Fed Rates. While The Rate Cut Will Be Marginally Positive, The Market Will Not Be Much Disappointed If There Is No Rate Cut.

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