Informist, Thursday, Sep 19, 2024

--Econ secy on Fed rate cut: Positive for global, Indian econ
--Econ secy: US Fed's 50 bps rate cut not too aggressive
--Econ secy:Don't see any major change in inflows due to Fed rate cut
--Econ secy:Don't expect volatility in fincl mkts due to Fed rate cut

--Econ secy on RBI rate cut:Should take appropriate call at right time

NEW DELHI – Foreign inflows into India are unlikely to change significantly after the US Federal Reserve's decision to cut interest rates by 50 basis points, Economic Affairs Secretary Ajay Seth said today. Seth called the rate cut a positive for the global as well as Indian economy and does not see it leading to any volatility in financial markets.

"It is a mere 50 bps cut from the high level (of 5.25-5.50%)," Seth told Informist.

Late Wednesday, the US Federal Open Market Committee voted to cut the federal funds rate target range by 50 bps to 4.75-5.00% against expectations of a cut half that size. The rate cut came after the US central bank had left interest rates at an over two-decade high for 14 months.

"The US economy is, basically, fine," Fed Chair Jerome Powell told reporters after the interest rate decision. The Fed is seen cutting interest rates by a further 50 bps in 2024.

Seth did not think the 50-bps rate cut was too aggressive and said the Fed had made a move that it felt was right for the US economy.

The Fed's rate cut comes less than a month before the Reserve Bank of India's own interest rate decision, with the Monetary Policy Committee set to meet Oct 7-9. Most economists don't expect the Indian central bank to begin its own easing cycle next month. Asked about what the RBI should do, Seth said the central bank should take the appropriate decision at the right time.

"Don't read too much into what happened yesterday (with the US Fed)," Seth said, adding that the US central bank's decision is based on performance of the US economy, while the RBI decides on the repo rate after considering local developments.

The RBI has left the repo rate unchanged at 6.50% since February 2023 as it battled to bring down inflation. As per latest data, headline retail inflation in August came in below the central bank's medium-term target of 4% for the second month in a row, standing at 3.65%. However, the RBI forecasts inflation to rise in the coming months and sees it averaging 4.4% in the first quarter of 2025-26 (Apr-Mar).

"This outsized cut has given EM (emerging market) Asia room to proceed with their own easing cycles," Madhavi Arora and Harshal Patel of Emkay Global Financial Services noted after the Fed's decision. "With the global market reaction having been muted thus far, the RBI still has flexibility to remain focused on domestic inflation and risk management, albeit there are over 20 days before its next MPC meeting. The RBI is likely to maintain its wait-and-watch stance and focus on being 'actively disinflationary', with a first rate cut likely by December. A case for an early cut is still less likely, and we continue to see shallow cuts by both Fed and the RBI in this cycle." End

Reported by Krity Ambey and Priyasmita Dutta

Edited by Tanima Banerjee

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