US Fed Rate Cut Impact On India and Global
The US Federal Reserve has implemented a massive monetary policy shift on September 18, 2024, when it had reduced interest rates for the first time since 2020. The federal funds rate cut by 50 basis points to a range of 4.75–5% saw mixed reactions around the world. Let's look into its global impact, its effect in India, and some important key factors.
Why the Fed Cut Rates?
The primary objective of the Fed cutting rates is to keep the economy growing while not allowing inflation to creep up. US economy inflation had decreased from peaking at 7% in some months to 2.2% by August 2024. However, with unemployment touching 4.2%, the Fed had to turn to boost the economy through lowering borrowing costs.
Answer: Jerome Powell, chair responded to the reality of maintaining maximum employment and stable prices, mentioning low interest rates would soften financial stress for businesses and consumers.
Global effects of Fed Rate Cut
As the biggest economy in the world, the US is considered an economic linchpin to the rest of the markets. Any policy turn by the Federal Reserve creates ripples all over, with especial impact on countries most dependent on US trade and investment.
Spillover Effect on Foreign Exchange Markets
One immediate spillover of such a policy by the Fed is the impact on the foreign exchange market as well. Being the reserve currency of the world, any rate movement impacts the value of the dollar. The effects of a weak dollar increase the attractiveness of US exports and lead to an improvement in trade balance for the country. Conversely, for many emerging markets that held much debt denominated in dollars, it helps them repay the same cheaply.
According to Reena Aggarwal, the associate professor of finance at Georgetown University, "This Fed rate cut makes borrowing costs in emerging markets cheaper and some relief can be given to countries like India, Brazil, and South Africa". She also cautions central banks everywhere will respond to what the Fed does differently from each other based on their inflation and growth rates.
This rate cut is also likely to reignite optimism in the global stock markets. Investors believe that a decline in interest rates is an opportunity to invest at equities markets for higher returns. US and global stocks will likely rise in the short term as borrowed money becomes less expensive through this rate cut, pumping up investments into businesses as well as consumer spending.
The overall effect is positive on the bond market because the prices of outstanding bonds with higher rates go up. This makes them rush in to buy bonds, which further pushes up their prices.
Impact of the Cut in US Fed Rate on India
India is no exception to this kind of vulnerability. The US monetary policies have long been felt in the global market of which India also has its shares, but yet, according to Economic Affairs Secretary Ajay Seth, much of the Fed rate cut had already been factored into India's markets. He feels that foreign inflows in India would largely remain intact as the Fed moves slower toward easing.
The Chief Economic Advisor V. Anantha Nageswaran also shared the same view, saying that India's stock market had already digested the news well in advance. The rate cut does well to India's and other emerging markets, but Nageswaran remains a bit cautious, and said, while it might not be a full-blown growth booster because other external factors might dampen its influence.
How Does This Affect the Common Man?
Broader implications
The Fed rate cut has broader implications that are not only for businesses and investors but for the everyday folk in both the US and beyond.
Low mortgage and loan rates
Probably the most visible impact will be in lower mortgage rates; for millions of Americans, it will be an entry ticket to homeownership, and those with existing mortgages may seek refinancing into lower rates. This increased activity in the housing market will be manifest in increased consumer spending and economic growth.
Credit Cards and Personal Loans
On credit card debts or personal loans, interest rates will be cut, thus helping people to alleviate their financial burdens. More money in the wallets will lead to increased consumer spending, and hence, the growth of the economy.
Savings Account
One drawback would be that savers, when they save in the form of bank savings accounts, will obtain lower rates as banks normally drop their interest rates for higher profits. Savers may actually seek higher returns in stocks or real estate; this would drive up demand for these assets.
Other Key Points to Note
Global Inflation: Despite the respite in most of the advanced economies, it remains an issue. Global inflation came in at 5.9% in August 2024. This reduction by the Fed could still pump more liquidity into the system and reflate the inflationary forces in the pipeline.
Emerging Market Debt: The country with dollar-denominated debt will also benefit partially in terms of debt repayment. But that is precarious because deep rate cuts can result in large currency fluctuations, which can eventually impact long-term stability.
The role of China: China continues to build up its international monetary system, with the yuan making up 4.3% of the world's payments in 2023. A small slice of the pie compared with the domination of the US dollar, the action of China in building up the influence of the renminbi will be something to look out for as the Fed's decisions take place.
Conclusion
In a nutshell, the rate cut by US Fed will have wide effects-from the emerging markets where part of the burden will be eased, to global markets that the move of US Fed will directly impact. India seems somewhat immune for now, but companies and investors worldwide will keenly watch the next move of US Fed.
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