Lower interest rates help investment assets such as equity and bonds.

In 2022, after the war between Russia and Ukraine broke out, there were supply chain disruptions. The combination led to inordinately high inflation. Central banks all over the world used the medicine they know: hike interest rates and take back part of the excess liquidity. At the juncture where we stand now, it seems rate hikes are over.

Let us look at some of the major economies:

USA: The Federal Reserve has paused twice, after the last rate hike in July 2023. Subsequent to the latest review meeting on November 1, 2023, the Fed chairman gave statements on both sides (hike/cut), implying the Fed would act as need be. However, it has been perceived by the market that rate hikes in the US are over. Now it is about waiting for rate cuts, likely sometime next year. The timing of the rate cut(s) expected next year is a matter of opinion, but broadly, it is expected in the second half i.e. after July 2024. The potential weakness of their economy going forward and forthcoming elections are reasons for them to cut rates.

Euro zone: The European Central Bank, after its last rate hike in September 2023, paused in their review meeting in October 2023. Here as well, like in the US, it is about waiting for interest rate cuts, likely sometime next year.

UK: The Bank of England, after its last hike in August 2023, has paused in the latest two review meetings. A common aspect of the US, Euro zone and the UK is that they have a huge stockpile of debt. Servicing is a burden, and higher the interest rate, higher is the burden. Their central bankers may put up a brave face and state that they would do whatever it takes to contain inflation; i.e., hike interest rates. Economists would recommend that inflation is still higher than their target of 2% and further rate hikes are required. However, practicalities have to be taken care of by central banks and governments.

China: It has been the exception, cutting interest rates ever since the Covid phase. Its inflation rate was negative 0.2% in October 2023. Nowadays, it is cutting interest rates as there are challenges on growth and issues in its financial and real estate sector.

India: The Reserve Bank of India did the last rate hike in February 2023, and has paused in all the review meetings thereafter. There is a case for rate cuts sometime next year, depending on inflation trajectory. Timing is likely in the second half, say, after June or July 2024. Inflation is likely to be within the tolerance band of 6%.

Lower interest rates help investment assets. For equity, money becomes cheaper and the discounting rate for future cash flows becomes lower. For fixed income, since bond yield and price move inversely, lower interest rate leads to higher bond prices. For floating rate loans to a market-linked benchmark, it helps to that extent.

For RBI’s decisions on interest rates, the primary parameter is our inflation. Global interest rates are relevant, which seem to be turning positive now.

Refer: https://www.financialexpress.com/money/your-money-rate-hikes-over-with-inflation-easing-3310194/