What will happen to the Indian economy and stock market when the Fed cuts interest rates?

This report comes from this week’s CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.

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The Fed is almost certain to begin its rate-cutting cycle next week.

Historically, rate cuts have been a signal for central banks in emerging markets such as India to subsequently ease monetary policy in their regions.

This time, however, things may be different.

When will India cut interest rates?

The latest data shows that India’s inflation rate appears to be heading in the wrong direction. The overall inflation rate rose to 3.65% in August from 3.6% the previous month. Food prices account for a large proportion of overall inflation and appear to be one of the main drivers.

Is this cause for alarm? This is not the case as the latest data remains below the RBI’s 4% target. Instead, markets are just taking a nap for now on the Reserve Bank of India’s interest rate cut.

Shilan Shah, deputy chief emerging markets economist at Capital Economics, said: “India’s headline CPI inflation edged up slightly in August, reinforcing our view that the Reserve Bank will proceed with caution and keep interest rates steady at its next meeting in October. Change. “But we won’t wait until after December to start loosening policies. “

But as Inside India reported last week, India GDP slowed to 6.7% in the second quarter compared with 8.2% last year, putting pressure on the central bank to ease the brakes as soon as possible.

The Fed’s rate cut is widely expected to provide more immediate relief to the Indian rupee, which fell to a record low against the dollar last week. Cutting interest rates before or at the same time as the Fed could lead to a lower rupee, further exacerbating inflationary pressures.

Mahesh Nandurkar, head of India research at Jefferies, said: “Global interest rates have risen sharply and a cyclical reversal seems likely in the coming quarters, which will create room for the Reserve Bank of India to gradually reduce India’s benchmark interest rate. ” In instructions to customers.

Bank of America is also expected to cut interest rates starting in December 2024, and interest rates in India will be reduced by a full percentage point by the end of next year.

How will the stock market react?

Absent a global recession, risk appetite following the Fed’s rate cut could help push emerging market equities higher in the medium term. However, a stock’s movement is unlikely to be a straight line.

Surendra Goyal, head of research at Citi India, said: “According to our colleagues, global equities generally perform well around interest rate cuts and are higher on average in the 12 months after the start of an easing cycle, barring a severe recession/ crisis.

However, Bank of America said the Nifty 50, India’s premier benchmark index, may be an exception to the rule.

Amish Shah, head of India research at Bank of America, said: “While the Fed cuts interest rates, it may also lead to an interest rate cut by the Reserve Bank of India, which will have a negative impact on the profitability of the banking sector, which in our index accounts for a large proportion.

Bank profits are often cyclical and dependent on the level of interest rates.

The fall in base rates is likely to squeeze margins at most banks, prompting Bank of America to take a “cautious” stance on the near-term outlook for the Nifty 50. Bank stocks have the largest weighting in the index, accounting for nearly a fifth of the 50 stocks.

“Our view is that large-cap stocks are not very expensive, so the market is likely to move sideways for some time,” Shah added.

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What happened to the market?

Indian stocks are poised to rise sharply this week. this nifty 50 So far this week, the index has gained more than 2%. The index has gained 16.83% this year, outperforming the S&P 500 by 25 basis points.

India’s benchmark 10-year government bond yield edged lower to just below 6.80%.

Sandeep Bhatia of Macquarie Capital told CNBC television this week that global geopolitical conflicts have not affected Indian markets due to ample sources of domestic liquidity.

Meanwhile, India’s IPO market has been “pretty hot” with “a steady number of listings over the past few months,” said Gurmeet Chadha, managing partner and chief information officer at Complete Circle. Chadha is also optimistic about the Indian pharmaceutical industry as the industry will benefit from the US biosafety bill if it is passed in the Senate.