DC Edit | Stock markets on steroids
When the US Federal Reserve hinted at a possible rate cut of 75 basis points going ahead, it set off celebrations on Dalal Street in India. The announcement worked like steroids for bulls, taking the benchmark 30-stock Sensitive Index (Sensex) up nearly 1,000 points on Thursday and again on Friday. In just a day, it had added Rs 3.4 lakh crore notional wealth for equity investors and almost as much more as the rally continued.
Cheap funds that the US Fed rate cut will bring in were said to be the reason for the rally in India. The lower interest rates in the United States will allow investors to borrow cheaper loans and invest them in high economic growth countries for investment arbitrage. Since India is the fastest-growing economy in the world, a large share of funds will come into India. It will also open the funding tap that was getting shut for start-up companies.
Behind the screen of positive, however, lies a cause for concern. What forced the US Federal Reserve, which was planning monetary tightening, to look at slashing the interest rate? Based on their study, strategists at Wells Fargo & Co. claim that the United States could see some moderation in 2024 consumption due to dwindling household savings, deteriorating credit conditions and signs of moderation in the labour market — to say in short, the United States economy is on the verge of slowdown.
The majority view among analysts surveyed by Bloomberg across the Group-of-10 nations and emerging markets is that 2024 will see a weaker dollar. When the US dollar gets weakened, it will force every other country, including India, to align itself to the trend. It will, therefore, result in the fall in rupee value. Since India’s imports are more than exports, the weak rupee will cause a different set of worries like high fuel prices, high commodity prices, and inflation.
While the US Fed rate cut is good for the fund flow, it is essential for the government and Reserve Bank of India to ensure that it is guided properly to prevent a debt build-up among the public and manage the fund flow, as they always do, diligently.