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The softening of US Fed rate by 0.5 percentage point (50 bps) is a welcome step, given the strengthening US economy with stable inflation, industry analysts said on Thursday, as the focus turns to India which is the fastest-growing economy in the world. 

After the rate cut decision, the US dollar turned higher, putting pressure on gold like safe commodities.

Sanjeev Agrawal, President, PHD Chamber of Commerce and Industry (PHDCCI), said the US economy is expanding steadily with growing economic activity with slightly elevated but low inflation.

“We expect that the cut in the federal reserve rate could lead to a decline in returns on equity and a rise in gold prices,” he said

Moving forward, given the uncertain global economic environment, “we expect the US Fed to maintain its vigil stance and alter the rates given the inflation pressures, inflation expectations, and financial and international developments,” Agrawal noted.

The Fed has kicked off its easing cycle with a somewhat surprising 50 bps cut, with Chair Jerome Powell justifying it as “the Fed's commitment to not being behind the curve”, rather than a response to an imminent recession.

The US Fed interest rate hike is expected to encourage the central banks of other economies to follow.

According to Madhavi Arora, Chief Economist, Emkay global financial services, the RBI is likely to remain focused on domestic dynamics, with a first rate cut by December.

“A case for an early cut is still less likely, and we continue to see shallow cuts by both the Fed and RBI in this cycle,” Arora added.

According to experts, this certainly marks the beginning of a pivot in interest rates after more than four years, though the final impact on the markets will be dictated by other economic data such as labour rates, inflation, unemployment rate etc that still needs to be keenly observed.

“The US isn’t the first economy to have cut rates, the UK, Eurozone and Canada have already begun this cycle while India is on a wait and watch mode. History shows that more often than not, India has followed the US in any interest rate pivot and this time too, there is high probability that we will follow suit,” said Dhawal Ghanshyam Dhanani, Fund Manager, SAMCO Mutual Fund.

Dhiraj Relli, MD and CEO at HDFC Securities, said while monetary policies could have a limited impact on global market trajectory, geo-political events and possible slowdown in other economies, including China, could be influencing the market trends over the next few weeks.

“US markets could draw in higher funds given this development and other markets could underperform. Indian markets seem top heavy for the time being but may not sell off in a hurry,” he noted.