US rate cut by 50 BPs: How India stands to benefit

The US Federal Reserve has slashed interest rates by 50 basis points (BPs). The first since 2020, the rate cut indicates a move away from curbs imposed in a bid to contain inflation.

“The committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” says a statement from the Federal Open Market Committee (FOMC), which executed the rate cut.

While the cut enables banks to lower loan rates for products ranging from homes and automobile to credit cards and business ventures in the US, thus boosting investment and spending, the move may also have a positive outcome on emerging markets as India.

Here are a few areas where India stands to gain:

FOREIGN INVESTMENT

An obvious impact on India could be rise in foreign investment. The rate cut means yields on securities in the US could shrink, and in turn investors would seek other markets. In the likely scenario that they look towards Indian markets, there would be a surge in prices of Indian stocks.

INDIAN RUPEE

The Squirrels had predicted in a report earlier this week the Indian rupee could benefit if the US Fed, led by Chair Jerome Powell, opted for an interest rate cut of 50 BPs. Speculations were rife at that point if the Fed would cut rate by 50 or 25 BPs. Probable growth in foreign investment would mean global investors would have to convert their currencies into the rupee, thereby strengthening the Indian currency. While this would definitely benefit importers in the country, Indian exporters, however, could be adversely affected.

IT SECTOR AND JOBS

Information Technology (IT) is the sector that looks most likely to witness growth, with US corporates increasing budget as a result of a fall in borrowing rates. This could boost jobs. Infrastructure is another sector likely to see growth owing to the 50 BP cut in interest rate.

MARKETS

The US rate cut could make existing bonds in the Indian markets seem more lucrative for investors compared to new ones, in turn boosting capital investments.