Will US Fed cut rates? How important is it for Indian market?

All eyes are set on the underway meeting of the Federal Open Markets Committee (FOMC) of the US Federal Reserve which concludes on September 18.

Even though the US Fed is broadly expected to announce a rate cut of at least 25 basis point to prop up slowing economic growth, the market is assessing the possibility of any surprise, thanks to cooling fears of a recession and signs of improvement in the macroeconomic environment of the US.

Moreover, the recent comments of Fed officials have shown their dissenting views over the state of the US economy which has raised curiosity for the rate cut decision.

However, analysts are still convinced that the Fed will go for a rate cut.

"There is a good indication of a rate cut. There is slowdown in the major economies across the globe. It is very much possible that the US Fed will announce at least a 25 bps rate cut," said G Chokkalingam, the founder of Equinomics Research & Advisory.

Pankaj Pandey, Head of Research – ICICI Securities, concurs. However, in his views, the commentary of the Federal Reserve is more important than the rate cut itself as it will set the tone for the further rate cuts.

"We need to see what road the US Fed choses to tread. A dovish Fed will be positive for the emerging markets, including India," he said.

Ashish Nanda, EVP & Business Head-PCG, Commodities and Currency Business at Kotak Securities, has said the concerns of recession in the US still looms which is a compelling factor for the central bank to cut rates. He also believes the commentary is more significant than the rate cut.

"Rate cut is more likely and market participants have been betting on it since July 2019. However, commentary from the Fed chief is more crucial and has kept everyone waiting. If it is dovish then further rate cuts would help emerging markets," Nanda said.

Some analysts believe the recent drone attacks on Saudi Arabia oil facilities can work as a catalyst for the US central bank to go for a rate cut.

"We expect the US Fed to reduce the rates by 25 basis points on the back of slowing growth concerns and fears of an upcoming recession. The rate cut could be even higher given the recent surge in crude oil prices after the drone attack on Saudi Arabia over the last weekend," said Amit Gupta, co-founder and CEO of TradingBells.

Impact on the Indian market

Market experts think that the rate cut will be a comforting point for the Indian market as it is likely to result into more fund flow to the Indian equities and debt.

"If rate cut happens, then dollar would correct that would minimise the downside for our currency. At the same time, it would also minimise outflow from FPIs," said Nanda of Kotak Securities.

Another positive is that it will give cues to the Indian central bank for deciding the trajectory of rates.

"In my view, Fed rate cut will give us comfort in terms of the kind of quantum of rate cuts which we can look to do," Pandey of ICICI Securities said.

But, what if the Us Fed goes against the widespread expectations?

"It would disappoint the equity markets around the world, as well as dollar strengthening further against other currencies," Nanda said.

It will be more detrimental at a time when the country is facing a double whammy in terms of rising crude prices and fall in Indian rupee.

However, analysts highlight that, even though the Fed rate cut is important for the market, domestic factors will remain the main trigger that will decide the course of the foreign fund flow.

"Earlier the Indian market was closely looking at the US Fed but now it has changed. The market is looking more inward now. Domestic factors are more important now than the Fed rates. While the rate cut will be marginally positive, the market will not be much disappointed if there is no rate cut," said Chokkalingam of Equinomics Research & Advisory.