By Bibhuti Dash in Bhubaneswar, September 22, 2024: Everyone’s talking about the US Federal Reserve’s (Fed) cut rates on Wednesday for the first time in 4 years! Incidentally, the US central bank’s aggressive move to cut interest rates by a half percentage point – for first time since 2020, could turn out to be a boon for the Indian economy.

Lower US rates can make investing in India more attractive. This strategy, known as carry trade, is where investors borrow money in the US (where rates are low) and invest it where rates are higher, making a profit on the difference. With more dollars circulating, the value of the dollar drops compared to other currencies. This could lead to more capital flowing into India, potentially giving a lift to stock markets.

A cut in US interest rate also makes it cheaper for Indian companies to repay loans taken in US dollars. Because a lower interest rate reduces the cost of loan interest repayments. On top of that, a weaker dollar also means fewer rupees to settle the same amount of debt. Assuming $1 is worth ₹85 today, if a rate cut weakens the dollar to ₹84, repaying a $100 million loan becomes cheaper — from ₹850 crore to ₹840 crore.

Take India’s IT sector, for example. Many Indian IT companies earn their revenue in US dollars. For context, in FY23, India’s tech industry raked in about $245 billion, mostly from service exports. So, lower rates and a weaker dollar could actually mean reduced revenues for these companies. The rate cut can also lead to a boost in Indian stocks, particularly in sectors like FMCG, Pharma, and Private Banks.

Then you have the effect on crude oil. When the US cuts interest rates, the dollar weakens, making commodities like crude oil more attractive to global buyers. This drives up oil prices, and for a country like India, which relies heavily on oil imports, it’s a big deal. The US is one of the largest crude oil suppliers to India.

So, if oil prices spike due to lower US interest rates, like they’re doing now, India could end up paying a lot more for its energy needs. That could even push up inflation back home, making everything from fuel to groceries more expensive. With the US Fed hinting at more rate cuts in the coming months — up to six more times until 2025 – to bring them down to a sweet spot of 3% to 3.5% from the current 4.75% to 5% range, India faces a tough challenge ahead.

Overall, the impact of the US Fed rate cut on the Indian economy is expected to be positive, with increased foreign investment, a boost to Indian stocks, and cheaper loans for Indian companies. However, some officials believe that the impact may not be significant. Amidst rate cut expectations at the upcoming US Federal Reserve meeting on September 18, Foreign Portfolio Investors (FPIs) continue to invest in on Indian equities pumping in ₹27,856 crore up till September 13. With these latest monthly inflows up till September 13, total FPI net investments for the calendar year have reached ₹70,737 crore, according to depository data.

FPIs have changed their strategy from selling to buying. One, there is a consensus now that the US Fed will start cutting rates from this month onwards pushing the US yields down. This will facilitate fund flows from the US to emerging markets. The Indian market is extremely resilient with strong momentum and missing out on the Indian market would be a bad strategy for FPIs. A high valuation in India, however, continues to be a concern. This shift in the investment wave is largely attributable to the Indian equity market reaching new all-time highs.