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To Cut or Not To Cut 📉

As the markets gave a little respite this week, we thought there would be nothing to write about for this section of the newsletter - but fate brought us to the hot topic of conversation that has taken the world’s notice - interest rates.

Multiple countries caught the media’s eye as they did two different things:

1. Rate Cut - Switzerland

  • Taking the initiative of being the first country to kick off the rate cuts that were expected this year, the Swiss National Bank announced a 25bps rate cut, making this the first rate cut in the last decade for the nation

  • While the timing was a surprise for everyone, this rate cut was due, since the country has been effective in the management of its inflation and keeping it under the 2% mark for 9 straight months

💡 This move indicated what everyone expected - 2024 is the year of the rate cuts, making the markets hopeful as people and businesses will be able to borrow at lower interest rates, and growth can come in as is naturally expected

2. Rate Pause - USA, UK, EU

  • The Fed announced yet another rate pause, with it promising 3 rate cuts before the year ends. While inflation is still higher than the target of 2% (3.4% as of Feb’24), the week ended with good news as GDP growth turned out to be 3.3% for the last quarter (the target was 2%)

  • The Bank of England has also exercised its right to pause as inflation is still at a high of 6.7%, which makes rate cuts premature for now. Even the ECB has commented on its reason for a rate pause being the fact that inflation is still above its target of 2% (2.8% as of Feb’24)

💡 The unified effect has been the obvious increase in the value of the dollar by the end of the week, with other currencies (including the rupee) tumbling down. Even gold prices that previously rose to all-time highs saw a pause in its rally

Will India Cut or Not?

The US Fed will most probably start cutting rates in June this year, with that being the global cue for other countries that are watching closely - so will India follow suit?

  • The RBI was confident enough to declare that a rate cut is on the table between June and August. With inflation at the 5% mark, it is also within the range set by RBI, and with the expectation of inflation to go below the 4% mark over the next few months, a rate cut is valid

  • Furthermore, the exciting, six-quarter high GDP growth rate of 8.4% for the previous quarter, the rate cut could assist in further growth for the economy (since companies get to borrow at lower interest rates, thereby incentivising them to expand their business)

Therefore, a rate-cut scenario is almost certain in the second half of this year for India, which makes the case for investors to look into 3 opportunities to place their money:

  • Equities (Little Risk) - As established above, companies tend to take up expansions when interest rates are attractive, making the case for potentially higher earnings off that expansion, and subsequent valuation re-rating, i.e. good for stocks in the long term

  • Long-Term Bonds (Lesser Risk) - In a rate-cut environment, long-term bonds that have been issued at the high rates that exist now will see a price rise, being more attractive than newly issued lower-rate bonds. This makes the former a good place to park funds

  • Fixed Deposit (Least Risk) - With FD rates crossing the 7% mark at most banks, these might be the highest rates most of us will ever see in our lifetimes. Hence, if you wish to lock in funds at this rate before the rate cuts, it could be the safest place to keep your money

While caution must be advised as equity markets continue to see sell-offs, this week does bear good tidings for the long term.

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