Fed rate cut positive, but may not have big impact on capital inflows: Top FinMin officials

NEW DELHI: A sharp 50-basis-point cut in the interest rates by the US Federal Reserve on Wednesday will be positive for the global as well as the Indian economy but it may not significantly drive capital inflows into the country that would warrant attention, top finance ministry officials said on Thursday.

Economic affairs secretary Ajay Seth sought to delink the Fed rate cut from any potential action by the Reserve Bank of India (RBI). The Fed has done what it feels to be the best for the US economy and the RBI will be guided more by the domestic reality, Seth said.

The Fed move comes days ahead of the RBI’s scheduled monetary policy review on October 7-9.

Separately, chief economic adviser V Anantha Nageswaran said at an event that much of the Fed action was factored in by investors and its impact on India could be more muted than on other emerging economies, as the domestic market has already been generating a lot of investor interest.

Everything else remaining the same, he said, the rate cut in itself should be a positive because it could decrease the global cost of capital and improve dollar liquidity. Many developing countries that were adversely impacted by the tightening of the US interest rates could feel some relief, he added.

But it would be difficult to precisely measure at this moment the fillip the rate cut could give to the world economy, as it would require assessments of a broad range of things. “On bounce, I would say it is positive for emerging economies,” the CEA said.RBI to decide on its own action
Responding to a question as to whether the RBI should initiate the rate cut cycle following the Fed move, economic affairs secretary Seth said, “This is for the MPC (Monetary Policy Committee) to take a decision at an apt time. Their decision is based on what is good for the Indian economy.”

“You should not read too much into the event (Fed rate cut), which happened yesterday,” he added.

RBI governor Shaktikanta Das has indicated a longer wait, linking the RBI rate cut to domestic inflation durably settling at the 4% medium-term target.

Retail inflation has stayed below the central bank’s 4% target for a second straight month through August. The Fed on Wednesday started the anticipated series of interest rate cuts with a bigger-than-usual reduction of 50 basis points that would keep the rates in the 4.75%-5% range.

‘Private players already in investment party’
Speaking at an event by Deloitte, the chief economic advisor refuted claims that private investments are yet to rebound, asserting that such companies have “already joined the investment party”. The private investment story “has already unfolded”, Nageswaran stressed, pointing at the rise in the share of gross fixed capital formation to 33.5% in FY24, roughly 3 percentage points higher than the level three years ago.

Going forward, India’s growth will be guided more by domestic demand, as global demand (export) is hemmed in by a proliferation of trade protectionism resorted to by several countries, especially since 2020, he said.