Investors around the world will be keenly watching what the US Federal Reserve does later today. The overall consensus is that chairman Ben Bernanke will cut policy interest rates by 25 basis points.
Local market gurus believe that lower US interest rates will send a fresh flood of FII money into India, pushing local stock prices to new highs.
This is a flawed theory. There is no doubt that extra liquidity will spill over into financial assets markets. That’s what happened in August, when Bernanke slashed rates by 50 basis points to thaw the frozen credit markets in the US. Stock prices in India soared.
But that was a surprise move in terms of the extent of the interest rate cut. This time it’s different. A 25 basis points cut has already been priced into valuations. Now, Bernanke will have to deliver a surprise—a deep cut or an unexpected pause—to significantly move the local market either way.