New Delhi: What the world expected happened on Wednesday around midnight. The US Federal Reserve cut interest rates by 50 basis points or 0.50 percent (US Federal Rate Cut). This is the first time since last year, i.e. after the Corona epidemic, that the US central bank has reduced interest rates. Its purpose is to boost the US economy which is facing the fear of recession.

Of course, the Fed Reserve's rate cut is quite big, but the US stock market did not welcome it in any way. All three major indexes there - Dow Jones, Nasdaq Composite and S&P 500 - showed a slight rise after the rate cut. But, in the end, all three closed with a decline. However, other Asian markets including India definitely showed a rise. But, in India, mid and small caps have fallen drastically. Some heavyweight large caps have given some support to the market.

Let us know why the confidence of American investors has not been restored despite a huge cut in interest rates? Is there still a risk of recession in America and what does the cut in interest rates in America not mean for India?

Why are American investors so uncertain?

Economic figures in the US have been sluggish for quite some time. Especially, unemployment figures. Many senior economists have been demanding reduction in interest rates for a long time. Federal Reserve Chairman Jerome Powell himself admitted in the press conference after the rate cut that there was some delay in reducing interest rates. However, he also indicated that interest rates may be reduced in the future as well. This will largely depend on inflation and other economic figures.

This is the reason why the reduction in interest rates did not have an immediate positive effect on the US stock market. In fact, according to investors, the reduction in interest rates should have started much earlier. This would have reduced the interest rates by 1 percent by now. This is the reason why the US stock market did not show the kind of enthusiasm that was expected. Even in India, mid and small caps were seen collapsing.

Is the threat of recession averted?

Everyone was aware of the danger of economic recession in America. Actually, inflation was increasing very fast in America after Corona. To control this, America adopted the path of increasing interest rates gradually. It was clear that eventually there would be an economic recession, due to which jobs would be lost. However, there has been no economic recession in America yet. The Federal Reserve started cutting interest rates as a part of damage control and this process is expected to continue until the health of the economy improves.

Now the challenge before the Fed Reserve is to ensure a soft landing of the economy. This means bringing the economy back on track without much loss on the economic and job fronts. Also, inflation will have to be managed so that it does not suddenly rise sharply. However, Jerome Powell assured that the US economy is fundamentally fine. This year the Fed Reserve can cut interest rates by another 50 basis points.

What will be the impact of reduction in interest rates?

A reduction in interest rates usually has the most positive effect on the stock market and gold, because the returns on these things are not affected by the reduction in interest rates. At the same time, the returns on investments like bank deposits and bonds may decrease. This also benefits the general public, because home and car loans become cheaper. Car loans in America are currently at their highest rate since 2001. Now companies will also get loans at cheaper rates, due to which they can also increase employment opportunities.

The rate cut in America can pave the way for lowering interest rates in countries like India. However, right now RBI is completely focused on reducing inflation. Recently RBI governor had also indicated that India's rate cut policy will not be as per other countries. But, it is believed that interest rates can be cut by the beginning of next year.

What is the expert's opinion on interest deduction?

Experts are not unanimous about the current cut in policy rates. Some believe that cheap loans will boost investment flow in India, while others say that this may reduce returns on equity and increase gold prices. PHDCCI President Sanjeev Agarwal said, 'Reduction in policy rates may reduce returns on equity. Also, gold prices may rise.'

On the other hand, MD of Kama Jewellery, Kalin Shah says that the reduction in interest rates is positive for the gold industry. It has opened the doors for gold to touch new heights soon. This will increase investment in gold. At the same time, some experts believe that the reduction in rates will prepare the ground for reduction in interest rates in emerging markets as well. Rohit Arora, co-founder and CEO of Biz2Credit and Biz2X, said, 'This will increase the flow of foreign currency in the Indian stock markets and strengthen the rupee. This will give RBI an opportunity to reduce interest rates in the future.'