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Fed cut positive for markets

A direct impact of the rate cut on Indian markets, however, depends on whether the RBI follows suit or not, reports Sanjeev Sinha.
Hindustan Times | By Sanjeev Sinha, New Delhi
UPDATED ON MAR 19, 2008 10:50 PM IST

The US Federal Reserve’s 75 basis points rate cut from 3 per cent to 2.25 per cent could be a little less than the 100 bps cut that many were looking for, but it is still it is likely to have a positive impact on the overall market sentiments as it eases the liquidity in the US markets.

Market analysts feel that in the US, the rate cut — the latest in a series of measures taken by the US central bank since September 2007 to bring back sanity to the financial markets and avoid a recession — is expected to boost consumption and the demand for consumer durables. All rate-sensitive sectors such as banking & financials, housing, consumer durables and automobiles, therefore, should be positively impacted by it.

The FMCG sector and retailers are also likely to benefit from the perceived boost to consumption provided by the rate cut.

“If the rate cut succeeds in averting a recession in the US, it would be positive for the Indian markets as a whole, particularly for export-oriented sectors such as IT (software), textiles, pharma and gems & jewellery, among others,” said Anil Chopra, CEO & director, Bajaj Capital.

A direct impact of the rate cut on Indian markets, however, depends on whether the RBI follows suit or not. As of now, the rate cut is likely to put pressure on the RBI to cut rates which, if it happens, will be positive for interest rate sensitive sectors such as banks, financials, consumer durables, automobiles, and capital goods, among others.

However, a point to note is that Indian interests at present are driven more by local factors. The RBI’s main concern is inflation, which is a function of higher food and commodity prices. “We do not, therefore, expect any change in the repo/reverse repo rates over the next six months. Given the fact that industrial production numbers have eased and credit offtake is down, money supply would moderate on the back of slowdown in net foreign exchange flows. “Overall, we expect domestic rates to nudge lower over the next year,” said Nandkumar Surti, CIO, fixed income, JP Morgan AMC.

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