Fed's rate cuts and hawkish outlook: Implications for Indian markets
The US Federal Reserve's decision to cut interest rates by 25 basis points (bps) in its December 2024 policy meeting has raised questions about how this move might influence India’s monetary policy and asset classes. This is the third consecutive rate cut by the Fed in 2024, bringing the benchmark interest rate to the range of 4.25%-4.50%. However, the Fed has signalled a slower pace of easing in 2025, envisioning only two rate cuts as inflation remains “somewhat elevated".
The Reserve Bank of India (RBI) faces a delicate balancing act. With the Fed signalling a slower pace of rate cuts in 2025, foreign capital inflows into India could diminish, especially as US treasury yields become increasingly attractive. This may prompt the RBI to consider steps to stabilize the rupee and manage inflationary pressures. The Fed’s decision adds complexity to RBI’s Monetary Policy Committee (MPC) deliberations, making a February 2025 repo rate cut less certain.
Moreover, the recent 50bps cut in the cash reserve ratio (CRR) reflects an effort to inject liquidity into the banking system. This measure, combined with falling interest rates globally, could support domestic economic growth. However, the interplay between global cues and domestic inflation will be pivotal in shaping the central bank's next steps.
Equities: Indian stock markets have already reacted negatively to the Fed’s hawkish outlook, with benchmark indices Sensex and Nifty witnessing sharp declines. On 19 December, the Sensex crashed 1,153.17 points, or 1.44%, to open at 79,029.03, while the Nifty 50 opened at 23,877.15, down 321.70 points, or 1.33%. The potential for reduced foreign capital inflows is a concern as the US debt market, with its more attractive returns,
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