ETMarkets Smart Talk | Rate cuts signal weakening US economy, caution advised despite 'risk-on' sentiment: Aashish P Somaiyaa
In an interview with ETMarkets, Somaiyaa said: “FII outflows might occur due to the negative outlook on US equities, and some market downside is expected. But with a lag, as currency dynamics shift, we should see significant FII inflows” Edited excerpts:
It looks like the stars are aligned for a possible rate cut by the US Fed in the next policy meeting. Does this indicate a sort of «risk-on» sentiment for equity markets?
Everybody views interest rate cuts very positively. However, I believe one needs to think a bit counterintuitively or with second-order thinking. The reason being that rate cuts and the magnitude of change in expectations can only occur with weakening economic data.
Generally, rate hikes come with strong economic performance and the need to curtail price growth and inflation.
Conversely, rate cuts typically occur with weak economic data. So, yes, on first thought, people might believe it's «risk-on,» but it’s usually accompanied by poor economic data, which one should expect from the US, and this could jumble up sentiment for a while.
Absolutely. For India, FIIs have been net sellers, at least in the cash segment of the Indian equity market, so far in August. Will a rate cut have any impact on the flows for the rest of FY25?
There’s no fixed or predictable playbook here, but I’ll tell you what I think, based on past observations. As I mentioned earlier, rate cuts generally come with poor economic data. Take March 2023, for instance.
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