Stock indices Sensex and Nifty expected to open slightly higher
The U.S. Federal Reserve's anticipated rate cut in September, with a 95% probability, is causing ripples in both Indian markets and the global economy.
For the Indian markets, a Fed rate cut usually leads to a weaker U.S. dollar and lower global interest rates. This could ease capital outflows from emerging markets like India. Lower U.S. rates may also reduce borrowing costs globally, potentially boosting investment and stock markets in India. However, Indian inflation and domestic economic conditions will play a significant role in determining the actual benefit the markets derive. The Reserve Bank of India could respond with an easing of policy or maintain a calibrated stance, depending on inflation and growth dynamics.
On a global scale, a Fed rate cut generally signals a more accommodative stance, reflecting concerns about growth or financial conditions. It can encourage global liquidity and risk-taking, supporting emerging market assets and commodities. However, inflation remains above target, and rate cuts may be viewed cautiously, raising concerns about sustained inflation pressures globally. Trade tensions and tariffs, mentioned as inflationary factors, may complicate the Fed’s move and its effects worldwide.
The expected rate cut reflects concerns about labor market fragility and the need to soften policy from a restrictive stance to support the economy. However, persistent inflation pressures and trade-related cost increases suggest the longer-term efficacy of rate cuts could be limited.
Meanwhile, global markets have been experiencing volatility. The U.S. payroll data for July showed a lower-than-expected expansion of nonfarm payrolls, leading to a tumble in U.S. stocks on Friday. The Dow dropped 1.2 percent, the S&P 500 fell 1.6 percent in its biggest single-day loss since April, and the tech-heavy Nasdaq Composite gave up 2.2 percent. European stocks suffered heavy losses, with the pan-European STOXX 600 index slumping 1.9 percent in its worst session since April. The German DAX plunged 2.7 percent, France’s CAC 40 plummeted 2.9 percent, and the U.K.'s FTSE 100 shed 0.7 percent.
Amidst this, oil prices traded slightly lower after OPEC+ agreed to another large production hike in September. Gold ticked lower after gaining the most in two months on Friday due to increased bets of imminent Federal Reserve rate cuts. Asian markets showed mixed results, with Japan's Nikkei falling nearly 2 percent and Seoul stocks climbing following a steep fall last week.
There is division among economists regarding whether the RBI's monetary policy board will continue cutting rates amid U.S. tariff shock and growth risks. Media reports suggest that India will continue purchasing cheap oil from Russia despite potential penalties from U.S. President Trump.
In summary, the expected Fed rate cut can provide temporary monetary stimulus amid inflation and geopolitical uncertainties. However, its longer-term efficacy may be limited due to persistent inflation pressures and trade-related cost increases. Indian markets are expected to open positively on Monday, following two consecutive sessions of losses.
The anticipated U.S. Federal Reserve rate cut could potentially lower borrowing costs globally, which might boost investment and stock markets within India's business sector. In the global finance scene, a more accommodative Fed stance can encourage global liquidity and risk-taking, supporting emerging market assets.
