RBI’s pause may continue, Dalal Street to tread cautiously

MUMBAI:

Wednesday’s 50 basis points rate cut decision by the

US Federal Reserve

may not prompt an immediate response from RBI in its Oct policy, though it could benefit India by easing pressure on the rupee and lowering borrowing costs for those with access to global markets.
In the equity market, the rate cut at the upper end of the 25-50 basis points (100 bps=1 percentage point) is expected to force investors to be cautious, with the sharp cut being an indication that the US economy may be weakening faster than what is visible now.

The 50 bps rate cut has been the first one in over four years.
“The Fed’s move is expected and may slightly reduce bond yields, as it has been largely factored in. RBI will focus on controlling inflation and is unlikely to react unless inflation falls on a sustainable basis. A lower Fed rate will slightly weaken the dollar, which will help stabilise the rupee,” Madan Sabnavis, chief economist at Bank of Baroda, said.
SBI chairman C S Setty echoed this view, saying, “Central banks are making independent decisions. While the Fed cut influences everyone, RBI will focus on

food inflation

before deciding on an

interest rate cut

. We believe a rate cut may not happen this year and could be delayed until Q4 (Jan-Mar 2025) unless food inflation improves significantly.”

According to Macquarie Research, NBFCs could benefit from a US rate cut, but banks’ performance depends more on non-performing asset cycles than on a cut in interest rates.
Among equity fund managers, according to Taher Badshah, CIO, Invesco Mutual Fund, the 50 bps cut by the Fed is ahead of much of the street’s expectations of a 25 bps cut and should spur a strong initial positive surprise to the market. “However, this aggressive start to the rate cut cycle may leave investors more concerned about the extent of the US

economic slowdown

and eventually hurt sentiments.”
Anish Tawakley, CO-CIO Equity, ICICI Prudential MF, however has a contrarian view. “The US 10-year bond yield is more relevant to the Indian equity market than the Fed’s overnight rate. Even with a 50 bps rate cut, I don’t expect the 10-year yield to fall significantly…(on the contrary) it may even rise.”
Tawakley, who manages about Rs 1 lakh crore worth of funds, said that US 10-year bond yields — which are already down to 3.7% — are pricing in expectations of several rate cuts over the next 18 months. “However, with the US economy still in reasonably good shape, growing rather than contracting, fewer cuts may be needed, and bond yields could move higher in the coming months.” And for the Indian equity markets, a rise in the US 10-year yield may signal a more cautious outlook ahead, he told

TOI

.