Expert View | US Fed to cut rates by 25 bps; elections unlikely to trigger FII outflows from India: VK Vijayakumar

The US Federal Reserve is set to announce its new interest rate decision on Thursday, November 7, after a two-day Federal Open Market Committee (FOMC) meeting after the US Presidential Election results. US Fed chair Jerome Powell-led rate-setting panel is expected to reduce the benchmark policy rate again after delivering its first rate after four years in September.

Headed by Powell, the FOMC will begin policy deliberations on Wednesday, November 6, for the seventh monetary policy meeting for 2024. Powell has expressed confidence in cutting interest rates for the current meeting, saying that inflation is on track to reach the US central bank's two per cent target.

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In the last policy meeting, the Powell-led FOMC slashed the benchmark interest rate by 50 basis points (bps) or (½) half a percentage point to 4.75 per cent-5 per cent after keeping it elevated at a 23-year high mark for 14 straight months since July 2023 to combat the worst inflation outbreak in almost 40 years.

Election aside, US policymakers have already communicated a desire to proceed with a more gradual pace of rate cuts after September’s supersized cut. Although the US election results might still be unresolved when the Fed ends its policy meeting this week, that uncertainty would have no effect on its decision to further reduce its federal funds rate. Analysts widely expect a quarter-point move on Thursday, followed by another in December. 

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Ahead of the US Fed policy decision, Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said in an interview with Mint's Nikita Prasad that the US Fed would likely deliver a 25 bps rate cut. The policy verdict may not trigger a major reaction in the Indian market unless the cut is more than 25 bps. The D-Street expert also believes the US election results may not profoundly impact foreign fund movement from Indian equities. 

Edited excerpts from the interview:

1.Global markets have priced in another interest rate cut by the US Federal Reserve in November, which will be the central bank's second policy reduction in four years. What are your key expectations from the US Fed's monetary policy, and what size of rate cut do you foresee at this time?

After the Fed's 50-bp rate cut in September, another 25-bp cut on November 7th is likely. This can be followed by another 25-bp rate cut in December. Fed action is always data-dependent, and by December, if the macro data deviates from expectations, the Fed may pause and wait for clarity. But as of now, the economy is strong, and inflation is on an expected downtrend.

Also Read: Fed prepares rate cut amid economic contradictions

2. The latest US consumer price index (CPI) data of September was mixed with a slight uptick in underlying inflation, even as the annual CPI was the lowest since February 2021. How do you think a 25 or 50 bps rate cut by the US Fed will impact India's financial markets?

The market has already discounted and factored in a 25 bp Fed rate cut in November. This is unlikely to trigger any major reaction in the Indian market. Stocks will respond highly positively only if the rate cut is more than 25 bps, which is unlikely.

3. The high-stakes US Presidential Elections 2024 are just around the corner, with the potential to stir heightened economic and financial market volatility in the near-term. How will the US election outcome impact the US and Indian stock market?

The impact of the US presidential election result will be only short-term. In the past, most election results had a positive short-term effect on the market. During the last three presidential elections, the stock market responded positively to the victories of Obama, Trump, and Biden. It is important to note that stock markets have responded positively to both Republican and Democratic victories. 

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After the initial response, macroeconomic fundamentals like GDP growth, inflation, and the Fed rate action will influence the market trend. A market concern is any potential extreme policy decision by Trump if he comes to power. Trump has threatened to impose high tariffs on Chinese imports. If he walks the talk, it can trigger a trade war with China, seriously affecting global trade. However, Trump, being a pragmatic businessman, is unlikely to upset the economic applecart.

4. Amid external triggers such as geopolitical conflicts and cheap valuation of the Chinese market, FIIs and FPIs have persistently offloaded from the Indian stock market since October. Do you think the US election outcome will impact FII outflows from Indian markets in any way?

The record FII selling through exchanges in October ( ₹1,13,858 crore according to NSDL) has been mainly triggered by the elevated valuations in India, the cheap valuations of Chinese stocks and hopes triggered by the Chinese stimulus. This ‘Sell India, Buy China’ hope trade appears to be over, as reflected in the recent downtrend in Chinese and Hang Seng markets. 

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However, as indicated by the Q2FY25 results, there can be more outflows from India due to some earnings concerns. The outcome of the US election is unlikely to impact FII flows meaningfully. However, it can happen if US bond yields rise sharply in response to unexpected developments.

5. US Fed chair Jerome Powell has expressed confidence in the US economy's outlook with inflation on a sustainable path to hit the two per cent target. Yet, the Fed is in no rush to cut rates quickly. Where will the benchmark rate reach by the end of 2024, and how many interest rate cuts do you foresee in 2025?

A 25 bp rate cut in November and December will bring the Fed rate to 4.5 per cent by the end of 2024. Rate cuts in 2025 will be data-dependent. If the US economy trends as per the Fed’s plan, three rate cuts of 25 bp each are likely in 2025, bringing the Fed funds rate to a 3 to 3.25 per cent range by the end of 2025.

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6. RBI continues to remain divergent among central banks with an actively disinflationary policy to achieve the four per cent target, even as global banks have entered their rate-cut cycles. What kind of impact will this have on the RBI policy, and when do you foresee a rate cut in India?

RBI has been prioritizing anchoring inflationary expectations rather than stimulating growth. Since growth has been resilient so far, this policy was appropriate. However, there are signs of a slowdown, as revealed by the Q2 corporate results, weakening urban demand, and weak core sector output. If the growth slowdown intensifies in Q3, the MPC might cut in the December policy. If not, the rate cut will happen only by February 2025.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.