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Rate cuts by the US Fed could be this year's theme

business Updated: Jan 03, 2008 21:26 IST
Market Watch

The US market had its worst annual start in 24 years as a dismal set of manufacturing data tumbled out. Most Asian markets may have followed the US in a knee-jerk reaction, but such economic data is actually paving the way for more positive liquidity triggers for emerging markets, including India. The worse it gets in the US, the more desperate will the Fed be to avert a recession. Expect at least a 25 basis point rate cut from the Fed in the end of January, maybe even 50 basis points if the economic news gets worse. And that will not be the end either. More will follow later in 2008, as the US lurches dangerously close to a recession.

Sitting here in India, we should not underestimate the power of these rate cuts. Remember, the big global rally in the second half of 2007 was triggered off by a surprising 50 basis point rate cut by the Fed. This, indeed, could be an overarching theme for global markets in 2008. More trouble in the US, leading to more rate cuts, creating more liquidity that chases growth where it exists--emerging markets, and within them in markets least affected directly by the US turmoil, like India. India's recent outperformance, particularly in the face of the periodic global sell-offs, is perhaps an indication of things to come. India is in a good position: the US illness does not affect us much while the antidote helps us directly.

Meanwhile, such rate cuts in the US make the Indian interest rate scenario quite interesting, particularly in a difficult currency situation. Crude oil maybe a wild card here. If the high price of crude oil starts filtering into the economy, as it should, inflation could start climbing. That may restrict the RBI's ability to ease interest rates as the market expects it will this year. In fact, the RBI's job could get tougher in 2008 if things continue this way. More dollar weakness led by US economic data, more flows to cope with as rates dip overseas and higher inflation from commodities. Happy New Year, Dr Reddy.

Udayan Mukherjee
Executive Editor, CNBC-TV18