Fed rate cut to have muted impact on India: CEA

Chief Economic Adviser V. Anantha Nageswaran discusses limited impact of U.S. Fed rate cut on India and emerging economies.

Chief Economic Adviser V. Anantha Nageswaran on Thursday said the impact of the U.S. Federal Reserve’s interest rate cut of 50 basis points will be limited for India, and though it will be a positive for emerging economies in general, it cannot be construed as a “fillip for the global economy” because there are other factors at play.

“If other things were constant, the rate cut by itself should be positive because it lowers the dollar cost of capital, increases the dollar liquidity… [but] with other things not staying contant, the Fed rate cut is not the only thing that matters. We have geopolitical conflicts everywhere and there is an all-important election that is coming up in the USA in November, and in general, the global economy has been slowing,” the CEA pointed out.

While the U.S. interest rate cut was “much awaited”, Mr. Nageswaran highlighted that the implications would depend on how much of that cut was already “priced in” by the markets. “I think much of it was priced in already. So, in that sense, stock markets have moved ahead of that, and if you see the U.S. markets, they ended up in the red for the day after the rate cut was announced,” he noted. 

“On balance, I would say it is positive for emerging economies, and for India and its stock market, because it was already attracting a lot of investor interest and has been doing so for the last several years, on the margins, the impact will be limited because it is not something that investor interest for India was waiting for this to happen. It’s already been there,” the CEA averred. 

Mr. Nageswaran also dismissed concerns about private investors’ reluctance and asserted that the private sector has already joined the investment party.

“No matter what evidence we present, the stickiness of the belief that the private sector is yet to join the investment party refuses to go away. That shows the power of anecdotes over evidence, and that is human nature. But the truth is the private sector has joined the investment party,” Mr. Nageswaran underlined.