The US Central Bank kept rates unchanged for a third time in a row based on factors like a lower inflation rate, lower unemployment and expectations around an expanding GDP.  A strong consumer demand and improving supply conditions have led to an easing of the monetary policy. This is despite the fact that mortgage rates continue to remain amongst the highest ever in the US. The impact of FED’s decision to keep rates stable resulted in a wide spread implication across global markets. In the US, The Dow Jones Industrial Average closed at 37000. The S&P 500 touched the 4700 mark and the NASDAQ went up by about 1.3% overnight. Globally too, stock markets across Europe, Brazil and Hong Kong also witnessed a run up. The Sensex went up by over 925 points and ended the day at 70,514.20 within a day of FED’s announcement. This announcement also gave rise to expectations around a series of rate cuts starting March 2024. The Bank of England and the European Central Bank too have kept their rates unchanged.

Does this bode well for India?

India’s recently released figures show that economic growth has been growing at a stable 7.6% during the third quarter of 2023. But not without challenges:

• GDP growth rate in India has remained slightly lower as compared to what it was a decade ago.
• Employment rates among women continue to remain low at around 10-24% even as subsidies are impacting the economy.

Having said that, the economy is buoyed by a strong uptick in consumer demand across sectors. The supply chain too has been growing rapidly to match the increasing demand.

While FED’s current announcement has likely been price in, a further rate cut, will weaken the US Dollar as supply of the currency goes up, leading investors to look at other investment options. The FED’s stance and indications at easing rates could lead to a higher influx of foreign money into Emerging markets including India. It could also lead to a strong rally, especially in India as the ‘good news’ get ‘priced in’.

A reduction in interest rates or expectations around this could lead to an increased demand for high yielding bonds as their prices go up and yields decline. Equities are likely to be in demand as the relative attractiveness of these go up. Stock prices are likely to go up as a result of this increased demand from domestic as well as foreign investors. Overall, we think that India is well positioned to witness continued growth supported by lower borrowing costs and overall economic development.