InvestorQ : What does the Fed rate cut of 25 points mean for the Indian markets?
Riya Dwivedi made post

What does the Fed rate cut of 25 points mean for the Indian markets?

rhea Babu answered.
4 years ago

The global markets were expecting the Fed to cut rates by 50 bps but the Fed chose to be a little cautious and just cut the rates by 25 bps. It will watch data flows and then decide on the future direction. Here are some quick takeaways for Indian investors.

· The rate cut by the US Fed is largely reflective of that RBI action that is likely in the policy in August. The RBI is also now likely to cut the rates by 25 bps rather than 50 bps.

· The rate cut announcement by the Fed must be read with its statement on liquidity. In fact, Fed has decided to stop its bond reduction program 2 months earlier which is a sign that Fed wants to keep the markets liquid. That is good news for markets like India which largely thrive on liquidity flows from abroad.

· This is the first cut in rates in the last 10 years. Normally, the Fed has never restricted itself to just one rate cut, especially if it comes after a long spell of rate hikes. That opens up the possibility that the US Fed could now get into a series of rate cuts. Normally, Indian equity returns have been the best if bought at the beginning of the reversal of the US rate cycle. One can draw their conclusions based on the same.

Broadly, the rate cut is likely to be positive for Indian markets. Some do interpret it as a sign of global weakness but that is something everybody is aware of. That the Fed is willing to change its strategy to address the problem is the good news.