Let’s come to the very important and rapidly asked question on the internet today, Fed cut rate.
What is the fed cut rate ?
Its economic policy to continue the economy during economic downturns. To make borrowing cheaper, encouraging businesses to spend more. To reduce unemployment. And to revive the economy.
Past data where Fed had cut the rates.
Look at the back, which reason the us Federal has cut the rate, To revive the economy and employment of the country.
- In (2007-09) : To combat the severe economic downturn.It was intended to get back the investment and consumer lending.
- In 2008 : The main reason was the financial crisis. It was intended to allow banks to borrow money from lower rates, which would increase the liquidity.
- And the Fed has used interest rates to respond to various economic recessions and slowdowns.
- And this time(2024-25), there is more potential to cut the rate because of Trade tensions, Global economic weakness, Inflation concerns, Financial market In-stability.
How impactful the Fed’s decision is for india.is it good for India or not ?
The impact on the emerging country India is more in the areas like capital inflows, India-US currency exchange rates, inflation and some special sectors can be affected.
Let’s talk to each one by one.
In terms of the Indian rupee.
A weaker U.S. dollar can boost the Indian rupee. When the Federal Reserve lowers interest rates, it makes U.S. investments less appealing. This can cause the dollar to lose value, which in turn can strengthen the rupee.
A strong Indian rupee can make Indian exports less competitive. When the rupee is stronger, Indian products and services become more expensive for foreign buyers. This can hurt industries like IT, textiles,rice and pharmaceuticals, which depend heavily on exports. A stronger rupee could lead to a decline in demand for Indian goods and services in international markets.
Inflows and Outflows of Capital and Investments.
Increased capital inflows : Lower U.S rates can drive FII into India, boosting liquidity.If fed has decreased the rate cut, investors go for the growing country which can generate more returns. This can lead to increased foreign institutional investments(FII) in Indian stocks and bonds.
Stock Market Boom: Potential investment in the Indian stock market can drive stock prices up in India. Sectors which like banking, real estate and consumer goods for share. More liquidity in the market can boost demand for shares, leading to overall market growth.
Impact on Inflation
A stronger rupee can help lower inflation by making imports cheaper, but it can also lead to higher domestic inflation. If the RBI lowers interest rates, this could further fuel inflation in the long run.
Boost of the oil imports : A weaker dollar economy could lower the cost of the crude oil imports for india.This can ease the inflation for the company which is highly dependable on the transportation sector, manufacturing sector and chemicals sector.
Impact on Specific Sectors
- Banking and Finance: A Fed rate cut could be a boon for Indian banks and financial services. Lower interest rates mean cheaper loans, which can encourage more borrowing and investing. This could boost liquidity and profits for banks and financial companies, especially those with foreign connections.
- Real Estate: Lower interest rates make it easier to buy a home or invest in commercial property. This could lead to a surge in demand for real estate in India, driving up prices and benefiting the construction and housing industries.
- Infrastructure and Industry: Industries that need a lot of money to grow, like infrastructure, energy, and telecommunications, could see a big boost. Lower interest rates mean cheaper loans, making it easier for these companies to invest and expand.
- IT and Exports: Unfortunately, a stronger rupee could hurt Indian exports, especially in tech and other industries that sell products and services overseas. When the rupee gets stronger, Indian goods become more expensive for foreign buyers, which can reduce demand and profits.
Bond Markets
Lower Interest Rates: When more money flows into India’s bond market, it can drive down interest rates. This is good news for the government and businesses, as it means they can borrow money at a lower cost.
Risk of Money Leaving: However, there’s a risk that this money could suddenly flow out of India if the global economy improves. So while interest rates might be lower now, India’s economy could become more vulnerable to sudden changes in the future if the U.S. economy gets stronger.
Foreign Debt
Lower Loan Costs: When the dollar gets weaker and the Fed cuts interest rates, it can be easier for Indian companies that borrowed money in dollars to pay back their loans. This is especially helpful for industries that need a lot of money to operate, like infrastructure and energy, which often borrow from foreign lenders.
Conclusion: Key Effects on Indian Economy after fed cut rate
A Stronger Rupee
- Export Challenges: A stronger rupee can make Indian products more expensive for foreign buyers, hurting export-driven industries like IT, textiles, and pharmaceuticals.
- Import Benefits: On the other hand, it can make imports cheaper, potentially lowering inflation.
Increased Foreign Investment
- Market Boost: When the U.S. interest rates fall, investors may seek higher returns in emerging markets like India. This can lead to increased foreign investment in Indian stocks and bonds, boosting the stock market and providing liquidity.
Lower Interest Rates
- Economic Stimulus: A Fed rate cut can encourage the Indian central bank to lower interest rates as well, which can stimulate economic growth by making it cheaper to borrow.
- Inflation Risk: However, lower interest rates can also fuel inflation if not managed carefully.
Winners and Losers
- Benefiting Sectors: Industries like banking, real estate, infrastructure, and capital-intensive sectors could benefit from lower interest rates and increased investment.
- Challenged Sectors: Export-driven sectors may face challenges due to a stronger rupee.