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Federal Bank’s committee’s interest rate policy
Chair Jerome Powell, On January 29, 2025, the Federal Reserve’s Federal Open Market Committee stated no interest rate cut anytime soon and decided to maintain the federal funds rate within the target range of 4.25% to 4.50%, taking a cautious stand.
The current US economy
Recent reports suggest that economic activity is expanding with a stabilized unemployment rate and a strong labor market followed by the appreciation of the US currency.
with higher interest rates, investors are keen on investing in US securities for better yields. Also, other global currencies such as the euro, yen, and yuan are weakened due to their economic struggles at present making global investors turn automatically towards US investments which also strengthens the US Dollar currency.
Reason backing the Fed’s cautious stance
With the economic growth trajectory believed to be at the pace at this interest rate, but the inflation persisting above 2 percent, this cautious policy is taken more on the purview of curbing inflation, as the committee seeks to bring it to the maximum of 2 percent in the future.
While ensuring that economic growth is at par and taking the cautious policy stance to control inflation, this stance can be seen as the balancing act as they say.
What’s in it for India? ‘A relentless selling of FIIs’
As stated above, the expansionary economic condition in the US attracts investors, FIIs continuously sell their holdings in India and invest in the US for better yields which puts Indian markets in a tight position.
Foreign investors have withdrawn around 8 billion dollars already in January 2025 alone due to concerns over market valuations and global yield movements.
Its DIIs of India are now holding the rope from this end by absorbing the selling pressure of FIIs. How long they would be able to hold is the question for the future to answer. with the Fed being in no hurry for the rate cuts, FII selling is likely to continue, putting a real test on the DIIs and retail investors.
Mixed Earnings growth
The earnings in the Q3 of FY 2024-25 are sluggish and mixed because of the global uncertainties and inflationary pressures.
The Automotive industry company Maruti Suzuki missed its profit opportunity due to higher discounts and a slowdown in sales of small cars.
The banking industry faces margin pressure due to lower loan growth and high interest rates. The Net interest margins are expected to dip in the coming months for large private and public sector banks.
The Management across different sectors commented on a conservative note regarding the business activity in the near future because of the economic uncertainties, inflationary pressures, and geopolitical tensions.
The Upcoming Budget for FY 2025-2026
This Budget is going to be like walking over a thin line kind of a situation. More Fiscal deficit management could be concentrated given the present economic conditions of India.
Firstly, a higher Fiscal deficit could potentially expose the country’s weaker economic fundamentals, prompting FIIs to sell off even more of their investments.
Second, a higher fiscal deficit could lead to higher inflation fueled by rising interest rates which will again make borrowing expensive and thereby restrict economic activity.
Therefore, maintaining the 4.5% fiscal deficit target can be an important consideration for the government. Having said this, it is likely that no big spending can be expected. A marginal increase in capex and a little push across sectors like infrastructure and manufacturing is likely to be there in the Budget.
Bottom line
Provided that the fiscal deficit target is the main consideration, it is unlikely to have tax cuts and stimulus spending. Further, with FIIs selling, and mixed earnings growth in Q3, Indian markets could be moving in a bounded manner.
Investors rather than acting in blind faith of buying in the dip, now the time is probably to pick companies across sectors which has a better command over their revenue-earning potential.
Disclaimer: The above article is written for educational purposes, and the companies’ data mentioned may change over time. The securities quoted are exemplary and are not recommendatory.