Fed Cuts Rates Again4 min read
The US Federal Reserve reduced its interest rate by 25 basis points (bps), continuing its monetary easing trend, which it started on Sep 18, 2024, when Fed reduced its funds rate by 50 bps. This reduction is part of a consistent effort to counter slowing economic growth and stabilize inflation, which has shown signs of moderation.
The recent cuts signal the Fed’s commitment to balancing economic support with inflation control, potentially aiming for another 25 bps reduction in December, which would impact lending rates and liquidity across global markets. It’s easy to forget that the Fed was holding the federal funds rate at around zero as recently as the first quarter of 2022.
Last 5 Rate Changes (bps)
Source: Forbes
Bond Yields and Dollar Index Reactions
After declining in September and October following rate cuts, U.S. Treasury yields rebounded in November, with 10-year yields exceeding 4% (please check the image below).
This unexpected rise may stem from a robust US economy, increased bond supply, and expectations of heightened fiscal spending by the Trump administration, complicating future rate cuts. While rate cuts typically weaken the U.S. dollar, the Dollar Index (DXY) has risen through October and November, defying trends and exerting pressure on global currencies, including the Indian rupee.
Source: www.investing.com
Impact on Import-oriented Sectors
Crude Oil
A Fed rate cut can soften the US dollar, making crude oil imports more affordable for India, easing costs for refineries and downstream sectors like chemicals and plastics. However, factors like geopolitical tensions still impact oil prices.
Electronic Goods
Electronics are a significant import for India, and a weaker dollar can slightly reduce the cost of imports from countries that transact in USD. Companies in electronics and consumer goods could benefit from lower import costs, allowing them to maintain or even increase profit margins.
Machinery & Heavy Equipment
The weaker dollar could benefit sectors importing machinery, as equipment from the US or dollar-denominated imports from other regions may become more affordable.
Chemicals
India imports a substantial volume of chemicals, and a weaker dollar could lower import costs, benefiting chemical producers who rely on these raw materials.
Implications of Trump’s Election Victory
With Trump’s victory in the US presidential elections, his economic policies may complicate inflation control efforts. His administration has historically leaned towards protectionist policies, which could reignite trade tensions with major economies, like China. Such policies can drive up import costs, contributing to inflationary pressures, and challenge the Fed’s inflation targets, ultimately influencing rate policy.
Source: ET
Impact on Export-oriented Sectors
Information Technology (IT) and Services
IT and software exports are among India’s largest export sectors. A softer dollar, combined with persistent inflation concerns in the US, may impact revenues for IT companies that bill clients in USD. Although demand for IT services is robust, currency fluctuations can lead to margin compression. This scenario might push companies to hedge their forex exposures or adjust billing strategies to maintain profitability.
Pharmaceuticals
Similar to IT, pharmaceutical companies rely heavily on USD-denominated revenues, especially from exports to the US. A weaker dollar could reduce revenue in rupee terms. Additionally, if the US economy faces a downturn, demand for generic drugs and other exports could be impacted, prompting Indian pharma firms to diversify their client base beyond the US.
Textiles
Textile exports could experience mixed outcomes. While a weaker dollar might reduce competitiveness for Indian textiles priced in USD, the recent rate cuts could boost demand in the US, offsetting the currency impact. As consumer spending stabilizes, demand for textiles and apparel in international markets could see a slight lift.
Gems and Jewelry
The gems and jewelry sector, another major exporter, could experience varied effects. A weaker dollar might reduce the purchasing power of US buyers, impacting demand. However, lower USD costs for inputs, particularly if Indian jewelry manufacturers use imported precious metals, could help improve profitability in the domestic market.
Automobiles and Auto Parts
Auto and component exporters may experience slower demand if the US economy does not respond favorably to rate cuts. However, the dollar’s softening might reduce revenue in rupee terms, affecting profit margins. Manufacturers may look to increase exports to other regions with stable currency situations to counterbalance this effect.
Impact on India and INR
For India, the rate cut provides mixed signals. The Indian rupee is already near record lows, partly due to the strength of the US dollar and persistent foreign outflows. As the Fed eases, the dollar might weaken slightly, potentially relieving some pressure on the INR. However, given domestic inflation and other global economic pressures, the rupee’s trajectory remains uncertain, and further depreciation cannot be ruled out.
Investor Takeaway
Investors should monitor these developments closely. Diversifying portfolios and focusing on sectors resilient to currency fluctuations can be a prudent approach amidst these shifts.
Source: ET | www.investing.com | LiveMint
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