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Saturday, Dec 14, 2019

Fed rate cut may buoy Sensex

With the US Federal Reserve slashing its key interest rate by a further 25 basis points to 2%, Indian shares are expected to react positively, reports Vyas Mohan.

business Updated: May 01, 2008 23:52 IST
Vyas Mohan
Vyas Mohan
Hindustan Times
Hindustantimes
         

With the US Federal Reserve slashing its key interest rate by a further 25 basis points to 2 per cent, Indian shares are expected to react positively on the back of increased dollar inflow into equities and expectations of a rebound in the US economy.

“The markets should react positively with the Fed cutting its key rate by 25 basis points. The statement from the Fed also looked confident. The Nifty could touch 5,280 points and may carry forward the momentum to hit the 5,360 levels,” said Rajesh Jain, director and CEO of Pranav Securities.

However, the benchmark index of the Japanese stock market, the Nikkei 225, fell marginally to end the day 0.6 per cent lower at 13,766.9 points after the Japanese central bank said on Wednesday that the world’s second largest economy was slowing. Most Asian markets, including India's, were closed on Thursday for May Day.

While an interest rate cut in the US would make funds cheaper, leading to increased flows into emerging markets like India, it would also lead to cheaper credit to US consumers, pushing up demand for goods and services. The move will be favourable for Indian shares with more foreign money chasing stocks and a rebounding US economy will help export-dependent Indian companies boost their sales.

However, with the Reserve Bank of India hiking the cash reserve ratio by 25 basis points, banking stocks may not take part in the immediate rally, experts say. “Assuming 17 per cent growth in deposits in 2008-9, the RBI shall be sterilising Rs 48 billion on an incremental basis. Banks may take a call on deposit rates as the CRR hike hurts bank margins. Banks will have to be cautious as low deposit rates two years back were not helping banks grow their deposits,” said Tushar Poddar, vice-president, Asia Economic Research Team, Goldman Sachs India.