Interest Rate Cut Expectations In 2024 For India, US & the World: Impact On Stock Markets

Interest rate cuts and its impact on stocks markets will be a key theme for 2024. Macroeconomic policy measures are seeing a significant shift towards interest rate reductions by central banks. Some economists are expecting a cumulative drop of around 35 percentage points for large central banks – marking the steepest decline since 2009. This could also be the highest number of rate decreases over the last 15 years.

Central banks are responding to deflating inflation rates and reversing supply chain challenges. Energy costs, a primary inflation driver in the recent past, have started to stabilize. Moreover, the aggressive monetary policies previously enacted are now dampening economic momentum, leading to softer wage and rent growth. Let us understand how interest rates have changed so far across developed and emerging markets, along with expectations how much interest rates will be cut in 2024. We also deep dive into the impact of rate cuts on the Indian economy, stock markets & businesses.

How Many Rate Hikes Have Occurred So Far?

Rate hikes for Developed Markets in 2023

Comparing the year-to-date figures, G10 central banks have increased rates by a total of +1,200 basis points over 38 increments. This is significantly less than half of the +2,700 basis points increase seen in 2022, which included 54 rate adjustments.

In the developed markets, there was a single rate hike by Norway while seven other central banks from the group managing the 10 most traded currencies opted to maintain their rates. This decision signals a tentative stance among these economies, possibly due to the U.S. Federal Reserve’s unexpected dovish pivot, which has set the stage for potential rate cuts in the future.

Rate hikes for Emerging Markets in 2023

Emerging markets, on the other hand, showed a more pronounced trend towards easing. Overall, 2023’s tightening in emerging markets amounted to 5,075 basis points, a deceleration compared to the 7,425 basis points in rate hikes throughout 2022. US Fed’s dovish turn may have signaled central banks in emerging markets to maneuver and ease their monetary policies. And this deceleration is indicative of a global shift in monetary policy as economies adapt to evolving financial conditions.

Central banks of Czech Republic, Brazil, Hungary, Colombia, and Chile were among those that reduced their interest rates, making it the highest number of rate cuts in the past 3 years for this group. 13 central banks in these markets held their rate-setting meetings in December, with a total annual count of rate cuts reaching 945 basis points through 18 moves. This is a significant change from the previous year’s 1,765 basis points of rate cuts across 11 moves. Despite this easing trend, some emerging economies such as Russia and Turkey continued to hike rates due to ongoing inflation pressures and currency challenges, cumulatively tightening by 350 basis points.

What happened to Interest Rate Expectations in December 2023?

In December 2023, 8 out of 10 central banks of the world’s most traded currencies saw rate setting meetings, with only Norway raising rates by 25 basis points. Other central banks, including the European Central Bank (ECB), as well as those in Britain, Japan, Australia, Canada, and Switzerland, held their rates steady, mirroring the U.S. Federal Reserve’s stance. India also followed suit and maintained its rates steady.

What changed in December, was the Fed’s unexpected shift towards a more dovish position. This surprised stock markets, leading to speculation that rate reductions could occur sooner and be more rapid than initially thought. This naturally led to a significant boost for global and Indian stock markets. Despite this, European policy makers and others have not aligned with these market expectations, indicating a potential misalignment regarding the timing of policy changes.

The US Fed has attempted to curb any unnecessary & excess rate cut expectations. But economists are highlighting that a slowing global economy, diminishing inflationary pressures, and a downturn in the labor market may necessitate rate cuts from major central banks across the world. If central banks attempted to maintain the current rate levels, this may inadvertently tighten economic conditions. And it looks like central banks around the world are generally in agreement that further tightening may not be required, implying that rate cuts are on the horizon for 2024.

Are Interest Rate Cuts Expected in 2024?

The consensus among analysts suggests that the cycle of interest rate cuts is set to continue beyond this year. Leading forecasters project further reductions in 2025 for major economies like the US, the UK, the eurozone, and Canada. The rationale behind this continued easing trend is attributed to the current high and restrictive interest rates, indicating that the normalization of monetary policy may be a gradual process. Some economists feel that interest rates across various countries and forecasts that, with the exception of China, rates at the end of this year will be higher compared to the end of 2021. This trend is expected to persist into the following year for most of these countries.

Expectation isn’t that interest rates will fall below the neutral threshold. Instead, the anticipated rate cuts are seen as a move towards normalizing monetary policy rather than introducing new economic stimuli. This suggests a cautious approach to ensure that the policy rates are brought back to levels that neither restrain nor overly stimulate economic growth.

Reasons For Expected Interest Rate Cuts In India In 2024

The Indian market is gearing up for a potential interest rate easing cycle in 2024, a move that is increasingly viewed as likely.

1. Inflation Trends: The CPI inflation is projected to average around 5.4% in the fiscal year 2023-24, according to RBI. These projections, while slightly above the RBI’s target of 4%, show a trend towards easing inflation.
2. Economic Growth: India’s GDP is robust, but could benefit from lower interest rates. This could provide the necessary stimulus for sustained growth.
3. Global Economic Environment: Internationally, there’s an anticipation of an interest rate easing cycle starting between March and May in major economies like the USA and Eurozone. China has already begun easing its rates with expectations of a rate cut on 15th to aid its economy.

Impact of Interest Rate Cuts on Indian Economy & Stock Market in 2024

Impact on India’s Economy:

US rate cuts could lead to a more abundant supply of dollars from FPIs & foreign investors , potentially softening the dollar and strengthening the Indian rupee. This shift would have several beneficial effects for India:

1. Reduced Import Costs: India, which imports over 80% of its oil, could see a decrease in its import bill due to a stronger rupee. This reduction is crucial as oil constitutes a major portion of India’s total imports.
2. Current Account and Fiscal Deficit: A strong rupee could alleviate the current account deficit and indirectly influence the fiscal deficit by reducing the cost of imports.
3. Inflation Control: Lower imported fuel costs can help keep inflation in check, as they contribute significantly to overall transportation and goods costs.

Furthermore, a global easing in monetary policy led by the US Fed could influence the RBI to consider rate cuts, especially if inflation aligns closer to the 4% target. This could stimulate domestic demand and contribute to economic growth.

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