Soon after the drone attacks on Saudi Arabian oil facilities over the last weekend, market participants anticipated the US Federal Reserve to take a dovish stance in the Federal Open Markets Committee (FOMC) meeting on Thursday. As expected, the Central Bank did not seem to disappoint.
The US Fed Reserve reportedly slashed its key interest rate by 25 basis points (bps) to range from 1.75-2% in a move to recover the declining economic growth. The dovish stance by the Central Bank can be beneficial to all emerging markets around the world, especially India.
Impact on the Indian Market
Market participants can breathe a sigh of relief now after the rate cut as the Indian market can expect an increase in the flow of funds in the equities and debt market. Following the rate cut, the debt market witnessed a significant surge with bond yields rising considerably the very same day.
A decrease in the interest rate will result in the US dollar correction, which will, in turn, improve the performance of the Indian rupee. An improvement in the currency also tends to lower the outflow of foreign portfolio investments (FPI) from the country.
Also Read: FPIs continue their selling trend despite growth boosters
The Fed rate cut will also play a significant role in deciding the Reserve Bank of India’s (RBI) stance for the future trajectory of the key repo rates. According to analysts, the interest rate cut will provide the Indian central bank with enough cushion to decide the quantum of rate cuts.
However, domestic factors also play a significant role in deciding the flow of FPIs in the country. Over the years, the Indian market has been more focussed on the domestic factors when compared to the US Fed rates.
According to experts, the Indian market wouldn’t have been disappointed even if the US central bank had decided to keep the rates untouched. This is because the rate cut would only improve the economy marginally. Market analysts believe the Indian economy to have improved over the last few years, not due to the Fed rate cuts but due to the domestic factors which trigger the inflow of foreign funds into the country.
For any clarifications/feedback on the topic, please contact the writer at viswanathan.v@cleartax.in
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