The recent 50 basis point cut in interest rates by the US Federal Reserve (Fed) is expected to have a positive impact on the Indian economy, according to India’s Department of Economic Affairs Secretary Ajay Seth. Speaking to Moneycontrol, Seth expressed his optimism about the move, highlighting its potential to stabilize global financial conditions.
This rate cut marks the first since 2020 and comes after the Fed aggressively tightened monetary policy to combat inflation. The US central bank’s decision to lower its key benchmark interest rate to 4.75%-5% aligns with Wall Street estimates, signaling a potential shift towards a more accommodative stance.
While some might view the 50-basis point cut as significant, Secretary Seth believes that reducing rates from their elevated levels won’t cause major market volatility. He also expects foreign portfolio investments (FPI) into India to remain relatively stable, indicating no immediate need for heightened monitoring.
The Fed’s rate cut coincides with a decline in US inflation, which fell to 2.5% in August 2024, down from a peak of 9.1% in mid-2022. This latest data points towards a closer alignment with the Fed’s 2% inflation target.
With the US Fed easing its stance, India’s Reserve Bank of India (RBI) is expected to closely monitor the situation. The RBI has maintained its key benchmark interest rates for over 18 months and will hold its bi-monthly policy review in October. The upcoming meeting will be crucial in determining if the RBI follows the Fed’s lead and adjusts its own monetary policy.
