How will the US Fed status quo impact Indian economy?

After India’s apex bank maintained a status quo in the last monetary policy meeting earlier this month, it was now the turn of world’s most powerful central bank to make its stance clear.  No big rate rejigs were expected as far as the US Fed meeting was concerned. The only thing that the markets were looking for, was a forward guidance from the US Fed. And the Fed through its dovish commentary signalled three rate cuts in 2024, and to be more precise, made it clear that time for historic monetary tightening is far behind us. 
“The market has been looking for a dovish pivot from the Fed, and yesterday it got that,” Madhavi Arora, Lead Economist, Emkay Global Financial Services said. 

On December 13, Officials decided unanimously to leave the target range for the benchmark federal funds rate at 5.25 per cent to 5.5 per cent, the highest since 2001. The US Fed followed the same path as other central banks who wanted to have a soft landing for the economy in 2024 when inflation will be on a downward spiral and will reach the 2 per cent inflation target of the US Fed. 

In its quarterly projections, the Fed policymakers now expect “core” inflation to fall to just 2.4 percent by the end of 2024. They project the economy will expand at a modest 1.4 percent next year and 1.8 percent in 2025. “For the first time since the rate hike cycle started in early 2022, the US Fed provided strong indications of a 75-bps rate cut in the coming calendar year,” Suman Chowdhaury, Chief Economist and Head – Research, Acuité Ratings & Research said.  While the benchmark rates continued to be at a 22-year high, the Fed governor has been quoted saying “the rate is likely at its peak in the current tightening cycle.”

The dot plot of the US Fed is keenly followed by the Fed watchers and analysts as the dot plot signifies the interest rate forecasts at the end of the year over the long run. The 50bps downward revision in 2024 dot plot was led by revised economic projections, which indicate that a large majority of the Committee is comfortable with multiple cuts next year even though growth is expected to be only modestly below trend. “The dots now show three cuts next year, and the post-meeting statement now acknowledges inflation has eased. Chair Powell’s comments at the presser supported this dovish turn, stressing progress on inflation and labour market balance. While he maintained that the Committee is not yet convinced it is done, he conceded that the conversation will soon transition to discussing less restrictive policy,” Arora of Emkay Global Financial Services added.

Impact on Indian Economy
The US Fed decision to maintain the status quo and the dovish commentary has raised market expectations of even a sharper rate cut in the coming year and is likely to have an impact on the capital inflows to India.
“Expectations of even a sharper rate cut in the coming years is likely to lead to fresh capital inflows (FPI) to India in the next few months. There are already indications of a rise in FPI flows over the last few weeks which is translating into sharper rises in domestic stock market indices,” Chowdhaury of Acuite Rating said. 
However, economists and experts believe that any rate cut before March 2024 is unlikely but if there are signs of a recession, the Fed is likely to take an accelerated route to lower interest rates. “This may also translate into a pivot in the repo rates in India earlier than envisaged in May-June 2024 provided, however, the headline inflation stays within the 5 per cent figure. Such an expectation may drive a rally in Indian bond markets,” Chowdhaury added further.

Going the Fed Way
Following the footsteps of the US Fed, today the Bank of England also kept the key interest rate unchanged at 5.25 per cent, which is the highest in the last 15 years. Similarly, the Swiss National Bank also kept the interest rate at 1.75 per cent as expected. 
"Inflationary pressure has decreased slightly over the past quarter. However, uncertainty remains high," the SNB said in a statement. "The SNB will therefore continue to monitor the development of inflation closely, and will adjust its monetary policy, if necessary," it said. Earlier the Reserve Bank of India decided to keep the repo rate unchanged at 6.5 per cent.