US Federal Reserve's Significant Rate Cut Sparks Optimism in Emerging Markets

The US Federal Reserve's decision to cut interest rates by 50 basis points is expected to facilitate fund flows to emerging markets, including India. Experts highlight that a weaker dollar and reduced borrowing costs will benefit these economies, though some challenges may arise due to currency strength.

The US Federal Reserve's move to cut the interest rate by 50 basis points is poised to facilitate financial flows to emerging markets. Experts assert that a weaker dollar and lower rates create a favorable environment for India and other emerging economies.

"The US Fed opened the rate cut cycle with a resounding 50 bps cut, aligning with updated market expectations. The transition from 'inflation is transitory' to 'higher rates for longer' signals the Fed's commitment to meeting market expectations. This rate cut aims to ease fund flows to emerging market assets, supported by a weaker dollar," remarked Nilesh Shah, MD of Kotak Mahindra AMC. The US Fed's decision on September 18 to reduce rates by 50 basis points resulted in notable market reactions, with the Dow and S&P 500 hitting new highs before the latter dipped by 0.3%.

Following the rate cut, gold prices surged beyond USD 2600 before retreating to USD 2554. Bitcoin also crossed USD 61,000 but mirrored the general market trend. Anil Rego, Founder and Fund Manager at Right Horizons PMS, emphasized that the US Fed's rate cut could positively impact India by enhancing capital inflows, stock market performance, and reducing borrowing costs. However, he cautioned that it may pose challenges for exports due to a stronger rupee.

Economic analysts concur that the US Fed's decision will buoy stock market sentiment in India. Jyoti Prakash Gadiaa, Managing Director at Resurgent India, noted that a rate cut by the US Fed indicates a pro-growth stance, likely influencing India's repo rate decisions. With CPI inflation in India already below the target rate of 4%, there is pressure on the RBI to consider a rate cut to foster economic growth.

Experts view the 50 basis points rate cut as both a positive surprise and a timely intervention. "Today's rate cut by the Fed was widely anticipated, but the 50 bps cut exceeds expectations. It demonstrates the Federal Reserve's confidence in its policy efficacy over the past two years," commented Raghvendra Nath, MD of Ladderup Wealth Management. With inflation near target levels and labor market conditions a concern, further rate cuts in the coming years appear likely.

(With inputs from agencies.)