The US economy is gradually weakening, especially in the labor market, and with inflation remaining low, there's a growing chance that the Federal Reserve will cut interest rates. This could lead to more investment flowing into emerging markets (EMs), with India likely to be a major beneficiary, according to analysts at Kotak Institutional Equities.
Recent US economic data shows that while core inflation is improving, other indicators of growth are declining. The easing core inflation supports the expectation that the Federal Reserve might lower rates soon.
Market observers will be closely watching upcoming Fed meetings to see if the central bank’s projections align more closely with market expectations.
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In the July meeting, the Federal Reserve is expected to keep interest rates steady at 5.25-5.5 percent. However, attention will be on Fed Chair Jerome Powell's speech for any hints about potential rate cuts.
If Powell hints at lowering rates, emerging markets, particularly India, could see increased investment. Kotak analysts pointed out that the strong performance of the US and the weaker performance of China have led to EMs lagging behind over the past two years. A US rate cut could boost interest in EMs, and India's strong economic position makes it a likely winner, though concerns about valuations remain.
However, because the US economy often grows slowly at the beginning of rate-cut cycles, private spending might decline, which could slow down the recovery of Indian exports. Indian IT services companies might also face valuation challenges if the expected US spending recovery is not fully reflected in current valuations, the analysts warned.
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