US Federal Reserve Chairman Jeremy Powell has announced a reduction of 50 basis points in the US Fed rate on 19 September 2024, reducing the US Fed rate from 5.5 percent to 5 percent. After the period of the Covid pandemic spread across the world 4 years ago, the inflation rate had registered the highest increase in the last 4 decades and with the aim of controlling the inflation rate, developed and many other countries were continuously increasing the interest rates so that the demand for products in the market decreases and the supply of products becomes in line with this demand. During the last 4 years, the US Fed rate had increased from 0 percent to 5.50 percent, but now after 4 years, it has been announced to reduce the US Fed rate.
The economies of many developed and developing countries are highly affected by the interest rates applicable in America. Whenever America announces an increase in interest rates, the investments made by the institutions and citizens of America and other developed countries in other countries start coming back to America because they start getting attractive interest rates on the bonds issued by American financial institutions and the US government. On the contrary, whenever America announces a reduction in the US Fed rate, the investments of the institutions and citizens of America and other developed countries in other developing countries start increasing because they start getting comparatively less income on the bonds issued by American financial institutions and the government. Due to this particular reason, many countries have to increase or decrease the interest rates in their country keeping in mind the decision of the US Fed Reserve so that the investments made by the institutions and citizens of America and other developed countries in their country are not affected much.
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Since the US Fed rate has been reduced by 50 basis points, many other countries may also announce a reduction in interest rates. This may start a cycle of reducing interest rates all over the world. However, this has already been started by European countries and Britain and now developing countries may also announce a reduction in interest rates soon. In India too, although the rate of inflation has remained under control for some time, but if the Reserve Bank of India had announced a reduction in interest rates earlier, then the possibility of the investment made in US dollars by the institutions of America and other developed countries to exit India would have increased. Today many countries of the world, especially in the economic sector, have become so interconnected that changes in the economic sector of one country also affect the economic sector of other countries.
The US Federal Reserve has also said that the US Fed rate may be reduced by 25 basis points twice in the calendar year 2024 and by 100 basis points in the calendar year 2025. Thus, the US Fed rate may come down to 3.50 percent. With the announcement of a reduction of 50 basis points in the US Fed rate, the yield on US bonds issued for 10 years has come down to 3.73 percent and the dollar index has also come down to a low of 100.37. Now the pressure on the US dollar will increase in the international market, which may lead to devaluation of the US dollar. Due to this, capital will now leave the US markets and go to the stock markets of other emerging countries in search of more income. India can benefit the most from this because India has already overtaken China in the MSCI Emerging Market IMI (Investible Market Index) Index and has come to the first position. In this index, the weightage of Indian shares has become more than that of Chinese shares. The world’s financial institutions, sovereign funds, pension funds and other investors trust the MSCI index more and also invest in the shares included in this index.
Secondly, it is now quite possible that the Reserve Bank of India will also announce a reduction in the repo rate soon because the era of high interest rates in the US is now coming to an end. The increased interest rates in the US were not only having an adverse effect on the Indian rupee but there was also pressure on foreign investment in US dollars from the US and other developed countries to India. Now, by reducing the US Fed rate in the US, the pressure on the Indian rupee and the fear of foreign investment going out of India will also be reduced. Also, if the era of reducing interest rates begins in India too, then the Indian industry will benefit from this and their profitability will increase which will help in attracting foreign investment to India. India’s foreign exchange reserves have already reached its highest level of US $ 689 billion. Now, in the changed circumstances, if the Indian stock market attracts more foreign investment to India, then India’s foreign exchange reserves have the potential to cross the level of US $ 100,000 crore. Thirdly, due to reduction in interest rates in India, the cost of goods produced by the industry in India can also be reduced and the products manufactured in India will be able to become competitive in the international market, this will create the possibility of increase in the export of Indian products. Fourthly, due to reduction in interest rates in the American market, the profitability of multinational companies working in the field of information technology will increase and these companies can increase their expenditure on research for innovation, which will directly benefit the companies working in the field of information technology in India.
The installments of loans taken by the general public from the banks can also be reduced now, this will increase the amount spendable especially by the middle class families which will help in creating demand for various products. Overall, it can now be said that the good effect of the reduction of US Fed rate in America will be visible in the coming times on developed countries and other emerging economies of the world including India.
– Prahlad Sabnani
Retired Deputy General Manager,
state Bank of India
K-8, Chetakpuri Colony,
Jhansi Road, Lashkar,
Gwalior – 474 009
