The December ‘Santa Claus’ market rallies have begun around the world with the US Federal Reserve announcing the possibility of at least three interest rate cuts next year. However, the Santa season for the Indian market arrived last week with the BJP’s victory in three states—that event pushed the Sensex and Nifty to all-time highs. The enthusiasm was still fresh when the Fed’s 2024 rate-cut statement boosted sentiments even more. The exuberance is stemming from easing inflation, rising growth and, topping it all, some certainty of a new interest rate regime next year. But economists caution against such exuberance, as loosening rates too fast and early could overheat the economy.
That said, what is clear is the shift in global monetary policy stance. If 2023 saw central banks single-mindedly focused on reining in inflation, 2024 would likely mark the beginning of the end of one of the toughest tightening cycles in recent decades. After all, the US Fed has in recent years implemented one of the most aggressive rate increases in decades, holding its Funds rate between 5.25 per cent and 5.5 per cent. This week it sent out the clearest signal that its hawkish stance was drawing to a close. Further, Fed chair Jerome Powell confirmed that the central bank was “very focused” on not waiting too long to cut rates. The policy rate is now expected to fall by 0.75 percentage points in 2024 to 4.5-4.75 per cent and another full percentage point in 2025, before stabilising between 2.75 per cent and 3 per cent in 2026.
That is heartening for the markets to know. But the key point we should not miss is that even though the rates will be cut in 2024, they are not going back to pre-pandemic levels anytime soon. Similarly, though global inflation is cooling down, it is not reducing fast enough for central banks to start cutting rates with the same aggressiveness with which they raised them. This is why Powell and RBI governor Shaktikanta Das are reluctant to prematurely declare victory over inflation. Despite strong economic activity in the second quarter, the domestic economy is not entirely free of macroeconomic risks. The global outlook continues to be uncertain, with market narratives swinging between slowdown and recession fears. Crude oil prices have softened, but they remain volatile. Investors and policymakers should tread with caution.