The US Jobs August data released on 6th September almost makes a case for the US Fed to revise interest rates. This will be confirmed after the US Inflation Report on 11th September & Producer Price Index Report on 14th September. The pertinent question now is – how much? The data released shows that the labour market, albeit weak, has shown a resilience that might just put brakes to an economic downturn. Hence there might be a propensity to implement a 25bp cut rather than a 50bp cut. However, some Fed officials have commented that they are open to larger cuts in the coming months. This significant development in the monetary policy will for sure impact the Indian markets where investors and traders are closely monitoring the situation. India’s consumer price inflation rates are forecasted to remain 3.5% – 4.0% (forecasts due on 12th September). This development could influence India’s Monetary Policy Committee(MPC) to reduce interest rates. 

This might just set the stage for the rate-sensitive sectors to respond positively. The industries that might benefit are Banking and Real Estate. Some tailwinds can be anticipated owing to those developments. However, there are additional elements concerning the Loan to Deposit ratio i.e. the rate of deposit growth is slower as compared to the credit growth in banks. However, those concerns have been relegated to ‘Obnoxious Drumbeat’ by analysts. As per SBI research, the incremental deposit growth of 61 trillion has exceeded the incremental credit growth of 59 trillion since 2022. However, the concern regarding the valuation of PSU banks cannot be denied and we might see some profit booking by investors at this level. The private banks have still not shown a convincing rally since the bull run and the sector seems to be undervalued at this point. Most market analysts believe that the market has already factored in the 25bp rally. A rate cut beyond 25bps will be a pleasant surprise for the markets and we might see some new higher-highs. But deeper interest rate cuts will signal concerns about US economic growth leading to market volatility. Technically, the India VIX too at this point seems to have troughed for some time. Any rise will confirm that the markets might give a healthy correction. Any rate cuts by the Fed will also peg the INR stronger against the Dollar and this might be interpreted as a positive sign among the domestic investors. Rate cuts by India’s MPC might also be an opportunity for investors to explore Bond Investments, as a lowering interest rate makes the sector more attractive. 

The Fed in the coming few days will have to do a lot of tightrope balancing.