Slowdown, likely rate cut in US will drive foreign investment to India: Experts

In a report earlier this week, Fitch Ratings noted that elevated interest rates in the US since 2023 have begun to show some effect on the labour market and demand. Adding to worries, the global rating agency said politics remains an area of high uncertainty, with geopolitical risks here to stay.

The rating agency noted that signs of a slowdown in the US are evident in weak credit growth and slowing consumer spending.

This trend is expected to continue in the second half of 2024, with real GDP growth decelerating, though likely remaining above recession territory.

Continued disinflation and the beginning of a global monetary policy loosening have reduced the probability of a major negative credit risk, Fitch Ratings said. The ECB made its first rate cut in early June, following earlier moves by the Swiss National Bank and the Bank of Canada, with the latter cutting for the second time in late July.

"While we now expect a slightly slower pace of rate cuts in 2024 from the Federal Reserve than we anticipated at the end of 2023, the latest US inflation and labour market data support our view that two reductions are likely in 2H24," Fitch Ratings said.

Terming politics as an area of high uncertainty, Fitch noted that the forthcoming US election in November will be particularly relevant for global credit as it could mark a pivot point for policy in several important areas.

Wars in Ukraine and between Israel and Hamas have continued, as have simmering tensions in other hotspots.

"The broader context of geo-strategic friction between major powers remains a key long-term theme. The greatest risk to credit would come from a direct conflict in one of these hotspots," Fitch noted.

Meanwhile, in India, a key emerging market, analysts point out that loosening monetary policy through interest rate cuts in the US amid weak growth projections could drive investment inflows into India. FPIs have been net buyers in India in June and July, data from National Securities Depository Limited showed.

India's economy, growing fastest among large ones, and its robust fiscal discipline, amid the chance of reduced interest rates in the US through monetary policy loosening, paints a positive picture for fund inflows, asserted Vaibhav Porwal, Co-founder, Dezerv.

Porwal said, "FII flows into India should increase due to several factors. Firstly, India's economy is performing better than many global peers, making it an attractive destination for investors.

Secondly, with the risk-free rate expected to come down in the USA, investors will likely seek better returns elsewhere, including India. Thirdly, the government's robust fiscal discipline could lead to a rating upgrade for India, enhancing its investment appeal. Additionally, valuations of large-cap stocks, where FIIs typically invest, are currently at reasonable levels. Lastly, uncertainties like elections and budget announcements are behind us, providing a more stable investment environment."

Milind Muchhala, Executive Director, Julius Baer India, said the market has been seeing mixed activity by foreign portfolio investors in the recent past, with bouts of buying and selling, a trend likely to continue for some more time.

"Their activity will remain influenced by various factors, including the performance of the global equity markets, the movement of the dollar index, incremental geopolitical events, and opportunities in the Indian markets considering slightly elevated valuation levels," said Muchhala.

"While the US Fed provided mixed commentary in terms of their rate cut path, the recent weak job data, coupled with the benign inflationary environment, will definitely strengthen the case for a rate cut in September. The key thing to watch out for will be the path going ahead in terms of whether there will be more rate cuts during the calendar year or they get pushed out to next year," Muchhala added.

US Federal Reserve Chair Jerome Powell hinted at a possible interest rate cut in September if economic conditions align with expectations. The US central bank made these remarks during the latest meeting, which decided to keep the federal funds rate unchanged at 5.25 percent to 5.5 percent for the eighth time.