The jury is still out on the probability of a US recession. The US Federal Reserve lowered its benchmark interest rate by 50 basis points on September 18, for the first time in four years, in an aggressive start to a policy shift aimed at bolstering the US jobs market.
The Fed has projected to cut interest rates by 250 bps in 2024-26, though the cuts are not so aggressive as compared to the hikes that took place during 2022-2024 by a massive 525 bps.
Amid signs of slowing growth and controlled inflation, investors are weighing whether the Fed has delayed too long in cutting rates, potentially increasing the risk of a recession. The US central bank’s goal is to lower rates without disrupting the labour market, aiming for what economists call a “soft landing” – allowing the economy to cool without triggering significant job losses.
The fact is that every major Asian economy this year, including India, could have cut rates based on their own domestic inflation. ressures or lack of pressures, they haven't really been cutting rates because they didn't want to risk their currencies before the Fed started cutting. So now, with this 50 basis point cut, the room is open for them to start cutting rates.
The biggest risk for global markets today is geopolitics because of situations in Russia-Ukraine and the Middle East, which continue to escalate. Crude prices trading at the bottom of the range of USD 70-90 / barrel for an extended period is positive for India but reflects geopolitics concerns.
During the 2008-09 US recession, India's GDP growth slowed to 3.3 per cent from 7.7 per cent the previous year, but it rebounded to 7.9 per cent in 2009-
10. Capital inflows to India dropped significantly to USD 9.1 billion in 2008-09 from USD 108 billion in 2007-08 but recovered to USD 53.6 billion in 2009-10.
However, there is a slowdown in US now, not a recession. Experts believe that the US economy has shown remarkable resilience amidst challenges.
However, a challenge on the macroeconomic front for India is of navigating the continuing uncertainty in global economic prospects. India will likely encounter a cycle of policy rate cuts globally, amid fears of a recession in advanced economies and continuing geopolitical conflicts.
Supported by strong macroeconomic fundamentals, favourable business environment, high economic growth and expectation of rate cuts by the US Fed, foreign portfolio investors remained net buyers in the first five months of 2024-25, witnessing net foreign portfolio investment (FPI) inflows of USD 10.4 billion.
Driven by stable capital inflows, India witnessed the highest foreign exchange reserves of USD 684 billion as of August 2024. India’s forex reserves increased by USD 64 billion from January to August 2024, the highest percentage increase amongst major forex reserves-holding countries. The forex reserves are sufficient to cover more than 11 months of imports and more than 100 per cent of India’s external debt as of March 2024. Rising merchandise and services exports, coupled with stable foreign capital inflows, reflect the strong position of India’s external sector.
So, a US slowdown could lead to lower oil prices, which could reduce India's oil import bill and inflationary pressures. It could also lead to increased capital inflows into India, as American investors look for opportunities in India.
A US slowdown could also reduce India's trade surplus with the US, as exports to the US have been a significant part of India's overall exports. It could also impact India's GDP growth forecast, which could face further pressure if global demand weakens. The Indian IT sector could also face challenges, as US companies may reduce their IT budgets and postpone projects.
Although less correlated, a US slowdown could cause volatility in the Indian market, as negative global sentiment can impact foreign capital inflows. However, the Indian rupee could stabilise due to lower oil import bills and more capital inflows.
A stronger rupee could make imports cheaper, potentially improving India’s trade balance. However, these advantages may be temporary if the US economy weakens further.
In the longer term, the direction of the Indian stock market, however, will depend largely on global economic conditions, particularly the health of the US economy. If the US achieves a “soft landing” and avoids a recession, Indian equities may experience gradual growth. However, if the global outlook deteriorates, Indian markets could face increased volatility.
However, experts believe India is going to trade on it on its own news flow with domestic investors driving the market. India is less correlated to volatility in Wall Street. India was not correlated to the yen carry trade unwind that riled global markets recently. That was an encouraging signal that India is becoming less correlated.
India has now entered a phase of investments driven growth, as compared to a dominantly consumption-driven growth over the last decade.
Given the global backdrop, India looking at more like 6.5-7 per cent kind of sustainable GDP growth over the next several years.
However, India has to tread cautiously. Global trade dynamics are rapidly evolving. Geopolitical conflicts, trade disputes, climate change, and advances in Artificial Intelligence are reshaping the contours of international trade in terms of protectionist trade policies and shifting global supply chains.
