Look out for the goldilocks moment
US Federal Reserve's half-a-point interest rate cut on Wednesday — the first cut in four years — in their stride on expectations that 'Fedhead' Jerome Powell is front-loading the downcycle. This is the less scary scenario over the US tipping into a recession, and investors seem quite comfortable with it. But the rate action may not have played through yet.
Some of the seeming stability could be because of 'buy the rumour and sell the news'. Bond market reaction is muted. However, the pass-through must take place.
Equity markets are still trying to gauge the oncoming earnings slowdown. Currencies are steady despite a clear dollar negative rate cut. The rip tide in the financial markets is not here yet.
However, there's no saying it won't hit later. Investors, of course, would be happier with a gentler swell.
Emerging markets will have to deal with capital flowing out of the US. Since India is in focus, this could further stretch equity valuations.
The rupee will have to be managed for an orderly ascent. RBI will also need to factor in its interest rate differential with its American counterpart. But that is not its primary concern.
Getting through last-mile inflation control is. There is a lesser likelihood of synchronised central bank action on the downward leg of the interest rate cycle. Capital flow management becomes more strenuous, especially with the Chinese equity market on the ropes.
This would be the time to build stronger buffers while limiting the fallout on the real economy.
The world's two biggest economies — the US and China — are running out of breath, and this will make India's job of raising its export profile slightly more challenging. India may retain its relative attraction in financial markets. But
