US Fed rate cut unlikely to impact foreign inflows to India: DEA secretary

The US Federal Open Market Committee on Wednesday reduced the lending rate to 4.75-5.00 per cent from 5.25-5.50 per cent, a larger than expected cut

Chief Economic Advisor V Anantha Nageswaran said on Thursday that the impact of the US Federal Reserve's decision to cut the benchmark interest rate is expected to be limited for India as the move was largely anticipated. Department of Economic Affairs Secretary (DEA) Ajay Seth echoed this, stating that the US Fed rates were unlikely to "significantly impact" foreign inflows into India.

Nageswaran highlighted that the Indian stock market has positioned itself as an attractive bid for the investors and added that overall, the rate cut is beneficial for emerging markets. 

"The impact on India will be little muted... much of it (rate cut) priced in," Nageswaran said at Deloitte's Government Summit 2024.

Seth said: "We have to see from (the point of) where the (US interest rates) levels are. We have to see how other economies, markets behave."

Why did the US Fed make bumper rate cuts?

A day earlier, the US central bank announced a half-percentage-point rate cut, which turned out to be larger than what many analysts expected. Interest rate or lending rate, is defined as the rate of interest at which the central bank lends to commercial banks.

The US Federal Open Market Committee on Wednesday reduced the lending rate to 4.75-5.00 per cent from 5.25-5.50 per cent. 

Following the announcement, Fed Chair Jerome Powel said that the economy is fine, adding that Fed is seen cutting interest rates by a further 50 bps in 2024. The Fed had maintained interest rates at a two-decade high for 14 months.

Lending rates are increased when the government tries to tame inflation by making borrowing expensive. Reducing the borrowing rate will allow more money to be circulated in the market, leading to higher economic activity. The US Fed’s decision was driven by the recent lower than estimated manufacturing and job market data, which signalled that the US economy was facing a slowdown.

(With inputs from Reuters, PTI)