MUMBAI: The impact of the US Federal Reserve's rate cut will be muted on the country as it’s mostly priced in, a top government official has said.
Fund managers and analysts expect the decision to strengthen the rupee, increase forex inflows and soften bond yields thus lowering the cost of funds for the economy as a whole. They also expect the Reserve Bank to follow suit by December.
"The impact of the Fed rate cut on us will be a little muted as much of it has already been priced in," chief economic advisor V Anantha Nageswaran said at an event in New Delhi on Thursday.
On Wednesday, the Fed voted to cut the federal funds rate target range by 50 basis points to 4.75-5.00 percent from 5.25-5.50 percent, against expectations of a cut half that size.
This is the third 50 bps rate cut in the history of the Fed, the others being in 2001 (after the 9/11 terror attack) and then in 2007 after Lehman Brothers went belly-up sending the whole world into recession.
The US central bank had kept interest rates at an over two-decade high for 14 months.
Earlier in the day, economic affairs secretary Ajay Seth had also said the rate cut was unlikely to have any significant impact on foreign inflows.
"I don't see that making any a significant impact on inflows. We have to see from where the US interest rates levels are. We have to see how other economies behave," Seth told reporters in the capital.
Anindya Banerjee of Kotak Securities said unlike the previous two rate cuts of this level in the US, this comes at a time when the economy is still performing well.
The Fed action, however, did not create a rally on Dalal Street, as mid and small caps fell sharply Thursday, though the Sensex and Nifty closed with around 30 bps gains after rallying close to 900 and 225 points in morning trade.
Nilesh Shah, the managing director at Kotak Mahindra AMC, said the Fed rate cut will facilitate flows to the emerging market assets with weaker dollar and lower rates.