Could a rate cut by US Fed perk up markets? Here's what four leading fund managers say

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With Bank of Japan raising interest rates and sending global markets in a turmoil, all eyes are now on the US Federal Reserve and whether it cuts rates in September, as hinted by Fed Chair Jerome Powell.

Fund managers, meanwhile, believe that while the markets would definitely welcome a rate cut by the US Fed, one needs to wait and watch on the likely impact on foreign flows amidst a host of global headwinds.

“A rate cut is more likely in the September meeting, and markets will respond accordingly,” says Chirag Mehta, CIO - Quantum Mutual Fund.
“On the impact on markets, we need to see what drives the rate cuts. If it's a growth scare, the current curve may continue but if it's due to lower inflation, it's positive. Markets are currently spooked by bad US job data, Middle East geopolitical uncertainty, and the yen carry trade. Indian markets were expensive and needed a correction,” he explains.

On August 5, both the benchmark equity indices – Sensex and Nifty -- lost around 2.7 percent amidst a global selloff, as investor sentiment became jittery amidst weak global cues including the Japanese yen appreciating against the dollar, recession concerns following a weak US nonfarm payrolls data and a rising jobless rate numbers.

Given the combination of weak global macros, a section of fund managers believes that a marginal rate but by the US Fed might not help assuage investor concerns.

“When it happens, it is unlikely that a 25bps cut will have a significant impact,” says Sahil Kapoor of DSP Mutual Fund.

“Rate cuts happen for the economy. Central banks seldom take decisions looking just at the stock markets and volatility. As of now all indicators of interbank markets in US are normal. Hence, it could be out of place for the Fed to come and cut rates. We would have to wait and hear from regulators on their policy decisions,” he adds.

Similarly, Ashish Gupta, CIO, Axis Mutual Fund, says that while they do not expect any rate cuts in the upcoming monetary policy in India, strong growth, sustained food inflation and high frequency indicators would keep the central bank cautious.

“However, interest rate cuts when they do happen could lead to rotation to rate sensitive sectors in the market such as banks, diversified financials and real estate. FPI flows to India that have been lacklustre for the past three years should pick-up on back of US rate cuts and these could likely perk up equities,” says Gupta.

Incidentally, data from NSDL shows that FPIs have been net sellers at around $525 million in the current month till August 2. This is on the back of more than $3 billion net buying in each of the previous two months.

“We are seeing volatility in global markets, including India, due to two major changes. First, the Bank of Japan's shift in monetary policy caused a swift movement in the Japanese yen, leading to a reversal of yen carry trades. This will continue until positions rebalance and the yen stabilizes,” said Mahendra Kumar Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers.

“Second, in the US, economic sentiment has shifted, with unemployment rising to 4.3% and lower PMIs, causing unease about the economic outlook and the Fed's response. This volatility is expected to stabilize as markets find their optimal level. Regarding fixed income, it’s likely the Fed will cut rates soon, potentially by a higher amount in the next meeting, possibly 50 basis points. The market consensus now expects deeper rate cuts than anticipated a couple of weeks ago,” he explains.

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