FOMC minutes spell good news for global markets? Will Indian equities and rupee be strengthened too?

The Federal Reserve released its July meeting minutes in the late hours on Wednesday that boosted overall global market sentiment. Indian equities, too, continued with their upward trajectory for the sixth day in a row after the release as the likelihood of the Fed's interest rate cut will spur foreign fund inflows into developing economies like India. 

What did the Fed noted in its July meeting minutes?

The Fed meeting summary said, "the vast majority observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting."  Many participants commented that monetary policy continued to be restrictive, although they expressed a range of views about the degree of restrictiveness, and a few participants noted that ongoing disinflation, with no change in the nominal
target range for the policy rate, by itself results in a tightening in monetary policy.

All in all the market are fully factoring in a September cut, the first since the emergency measure take in the early days of the Covid fall-out.

Members of the FOMC also acknowledged that the risks to achieving the Committee’s employment and inflation goals had continued to move into better balance.

In support of the Committee’s goals to achieve maximum employment and inflation at the rate of 2 percent over the longer run, members agreed to maintain the target range for the federal funds rate at 5¼ to 5½ percent, added the minutes summary. 

Members concurred that, in considering any adjustments to the target range for the federal funds rate, they would carefully assess incoming data, the evolving outlook, and the balance of risks.

How analysts view the rate cut trajectory to be like after Fed's latest meeting minutes?

Sugandha Sachdeva, Founder of SSWealthStreet told Zeebiz.com that the minutes from the latest Federal Reserve meeting reveal a strong inclination among several policymakers to lower borrowing costs at their upcoming September meeting. The prospects of a 25 basis points rate cut in September have gained further credibility from these minutes, as inflationary pressures continue to ease and the labor market shows signs of softening.

Madhavi Arora, Lead Economist, Emkay Global Financial Services held that the market is still pricing in a 100 bps rate cut by 2024-end. Sachdeva, however, given the overall landscape foresees rate cuts at all remaining Fed meetings in 2024.

Additionally, the US central bank has delayed the start of its monetary easing cycle, making it likely that the Fed will reduce rates by 75-100 basis points over the course of its 2024 meetings, added Sachdeva.

Notably, interest rates have remained elevated for an extended period, currently standing at a 23-year high, and have effectively curbed high inflation. However, with inflation under control and labor market concerns emerging, the Fed appears poised to shift towards a more accommodative stance.

In contrast, Palka Arora Chopra, Director of Master Capital Services stated that although indicators suggest a potential rate decrease, the odds of such a significant cut are still uncertain. Currently, traders estimate a 38 per cent chance of a 50-basis point reduction, up from an earlier expectation of 33 per cent, while a 25-basis point cut has a 62 per cent probability.

How likely will Fed rate augur for Indian equities?

Chopra noted that in response to a potential Fed rate cut, Indian stocks that may benefit include those in the IT, BFSI (Banking, Financial Services, and Insurance), Auto, and Realty sectors. A Fed rate reduction typically weakens the US dollar, increases liquidity, and lowers borrowing costs, which can positively impact these sectors.

Overall, the rate cuts will be welcomed positively by the Indian market because the Reserve Bank of India is following the US Federal Reserve's lead when it comes to interest rates, and their announcements will spur additional rate cuts in India, which will enhance liquidity, attract capital inflows, and strengthen the value of the rupee, she added.