"A 50 basis point rate cut by the US Federal Reserve should not be seen as a cause for concern. In fact, it can be viewed as a positive signal for the markets," said Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, in an interview with Moneycontrol.
According to Sharma, the Fed's decision to implement a more aggressive cut reflects a proactive approach aimed at maintaining economic stability and growth, particularly with inflation now under control and growth slowing.
He also suggested that with demand softening across key sectors, the Reserve Bank of India (RBI) may consider a pre-emptive rate cut before 2025 to stimulate consumption and bolster economic momentum.
Sharma, who has over 15 years of industry experience specialising in quantitative analysis and statistical modeling, added that near-term market corrections are likely to be temporary, given India's strong macroeconomic fundamentals and long-term growth prospects.
Do you expect a series of interest rate cuts from the US Federal Reserve in upcoming policy meetings?
Yes, we expect a series of interest rate cuts leading to the US elections. Historically, the Federal Reserve has often been mindful of political cycles, though it maintains an independent stance. In the current environment, where inflationary pressures have been moderating and growth has slowed, there is room for the Fed to consider loosening its monetary policy.
Moreover, there tends to be increased pressure to stimulate economic activity and consumer confidence in the months preceding the US elections. Data shows that the US economy has witnessed slower growth in 2024, especially in sectors like housing and manufacturing, which are sensitive to interest rates. By gradually cutting rates, the Fed can aim to support these segments and encourage business investment and consumer spending.
The political landscape also plays a role. With the US elections on the horizon, a more accommodative monetary policy could help stabilize markets and cushion the economy, which would be favourable for the incumbent administration.
Will the 50 bps Fed funds rate cut spook global equity markets?
A 50 bps rate cut should not be seen as a cause for concern. It could be interpreted as a positive signal for the markets. The Fed's decision for a more aggressive cut could indicate a proactive stance in ensuring sustained economic stability and growth, especially with inflation now under control and growth slowing.
Data over the past few months suggests that inflation has been moderating across key sectors in the US, with the latest CPI readings showing only marginal increases, well within the Fed’s target range of 2-2.5 percent. Moreover, sectors sensitive to interest rates, such as housing and manufacturing, have been facing softness, prompting the need for more aggressive monetary easing. This could spur investment and consumption, both of which have shown signs of slowing in Q3 2024.
For global equity markets, especially those in emerging economies like India, a 50 bps cut may be good news. Lower rates in the US could weaken the dollar, making emerging market assets more attractive. Furthermore, it would lower borrowing costs globally, encouraging capital flows into growth-oriented markets. The S&P 500 and other major indices have historically responded positively to rate cuts, especially when those cuts are aimed at pre-emptively supporting economic growth, as we would expect in this scenario.
Therefore, the Fed's 50 bps cut is likely to be interpreted as a strong measure to support global liquidity and growth. In this case, the long-term outlook for both US and global equities remains constructive.
Do you think the RBI will go for interest rate cuts only in 2025?
While a 2025 rate cut is widely expected, the RBI may move earlier. The central bank often aligns its policy direction with the US Federal Reserve, and if the Fed adopts a series of rate cuts, the RBI could follow suit to maintain currency stability and support growth. Additionally, post-COVID "revenge spending" in India appears to be tapering off, as seen in rising auto inventories and reduced urban consumption. For example, auto sales have shown a slight slowdown, and urban demand in consumer goods has been lower than expected in Q3 2024.
With softening demand across key sectors, the RBI might opt for a pre-emptive rate cut before 2025 to reinvigorate consumption and support economic momentum. While inflation control remains a priority, the need to boost domestic consumption may prompt an earlier rate cut, especially if global factors like Fed easing play a role. Thus, an earlier move in late 2024 cannot be ruled out.
Do you see strong earnings growth in the coming quarters in Indian markets?
We expect moderate earnings growth in the coming quarters, with particular strength in sectors tied to rural consumption. A good monsoon season has boosted rural demand, which should positively impact sectors like agriculture, FMCG, and two-wheelers. Companies in these areas are likely to see improved sales as increased agricultural output and higher disposable income drive consumption.
However, in urban areas, demand has softened slightly, especially in discretionary spending, which could moderate growth in some sectors like retail and consumer durables. Additionally, global uncertainties and inflationary pressures on input costs could limit margin expansion in certain industries. Overall, while rural consumption is expected to deliver good results, broader market growth may be tempered by challenges in other segments.
Do you rule out a significant correction in the Indian equity markets for the rest of fiscal 2025?
I would not completely rule out the possibility of a significant correction in the Indian equity markets for the remainder of fiscal 2025. Several factors warrant close attention. Key global risks include potential interest rate adjustments by the US Federal Reserve, geopolitical tensions, and volatility in commodity prices. Domestically, concerns around inflation management, liquidity conditions, and policy adjustments in the run-up to the national elections in 2024 may contribute to short-term volatility.
While market corrections in the near term are possible, they are likely to be temporary, given India's strong macroeconomic fundamentals and long-term growth trajectory. Historically, short-term market declines in India have often presented favourable entry points for investors, and fiscal 2025 may follow this pattern.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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