The 75 basis-point rate cut by Federal Reserve on Tuesday is unlikely to have any impact on the Indian equity and financial markets.Experts do not anticipate a rush by FIIs for buying equities. ?Most of these banks and funds are now risk-averse, even when emerging markets like India offer good returns,?? said a promoter of an FII based in Mumbai. ?I do not expect any significant surge in the liquidity, nor do I expect the Sensex to touch 20,000 levels in the near future,?? said Pradeep Madhav, managing director at STCI Primary Dealers Ltd.
According to bankers and analysts, the Fed rate cut, now revised downward to 3.5%, will neither increase the capital inflows into the equity markets through the foreign institutional investor route nor will it spur arbitraging due to the widening rate differentials between US and India. Logically, the Fed rate cut would have exploited the above two opportunities, as was the case in September when Fed cut down the rate by 50 bps to 4.25%, said most. However, the Fed cut this time has been borne out of a crisis where many top US banks have eroded their capital base as a result of their over-exposure to bad asset lendings, namely mortgage home loans to subprime borrowers. ?Having faced with capital erosion, the Fed cut is more a bail out package for these US banks to shrink their balance sheet,?? said a senior government banker.
OP Bhatt, chairman of the country?s largest government bank, the state Bank of India said: ?Different group of factors are operating in India and in the US. Just because rates are going up or down in the U.S. does not automatically mean the same will happen in India.”
In fact, Madhav expects some liquidity tightness in the domestic market that may lead to a lowering of reverse repo rate from 7.75% to 7.5%. This is th rate at which the RBI lends to banks. A likely cut in cash reserve ratio, that banks maintain as a percentage over its net deposits with the RBI, is also likely to be brought down by at least 25 bps from the present 7.50%.
This is largely to facilitate the significant rise in credit pick up and hence may not have an immediate impact on the overall interest rates, bankers opined.Bankers are bullish about the RBI making an announcement towards infusing liquidity in the system on Tuesday when it unveils the third quarter monetary policy review on Tuesday.
