Your Money- Rate cuts coming, but how soon-

Your Money: Rate cuts coming, but how soon?

By Joydeep Sen

The US FedERAL Reserve meeting on December 13, 2023 —where it decided to maintain the Fed rate — was perceived as a pivot, with widespread ramifications on markets all over the world. A report called Summary of Economic Projections is published in every alternate meeting of the Federal Reserve.

The median of the dots indicate 75 basis points (0.75%) rate cut in 2024 and further 100 basis points (1%) rate cut in 2025. This is significant. As per the SEP, GDP growth in 2024 is projected to be 1.4% against 2.6% in 2023. That is a steep deceleration. PCE inflation, which is the gauge tracked by the US Fed for decision making – it stands for Personal Consumption Expenditure — is projected to 2.4% in 2024 from 2.8% in 2023. This is about the official “numbers”.

That apart, it is about reading between the lines of the statement published by the Fed. Every word written, or even not written if conspicuous by absence, is analysed. In the press conference post policy announcement, the responses of the Fed chairman are dissected. All in all, it indicated that rate cuts are coming. Now it is a matter of when, not if. As per broad market view, it should start in March 2024. As per some analysts, it may start a little later.

The European Central Bank, in its meeting on December 14, maintained interest rates but its tone was dovish. The ECB has gone soft on its projections of economic prospects. Here as well, it is about when and not if, on interest rate cuts. Their inflation has eased to 2.4% in November 2023.

Impact on India

Global developments have an impact on us. The Reserve Bank of India did the last rate hike in February 2023, and has paused in the five review meetings thereafter. However, its stance remains “withdrawal of accommodation”. Prior to policy rate easing, the stance should change to “neutral”. It is expected that sometime in the first half of 2024, the RBI would change stance and sometime in the second half, it would start cutting rates. This, of course, depends on the inflation trajectory.However, a slowdown in global growth is not a positive for India. Our exports depend on global demand, which in turn depends on growth. Anyways, given that we have a large domestic economy, we should be able to manage.

Lower interest rates help investment assets. Our equity market took the cue and moved north. Bond yields moved south. Since bond yield and price move inversely, lower interest rate leads to higher bond prices. For floating rate loans market to a market-linked benchmark, you would not see the impact immediately but as and when the RBI starts the policy rate easing cycle.

(The writer is a corporate trainer (financial markets) and an author)