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Fed cuts rates by 75 bps to 2.25% points to restore confidence in the nervous financial markets and boost the ailing economy. US Treasury Secretary Henry Paulson had admitted earlier on Tuesday that the US economy is facing a “sharp decline”.

The Fed rate cut is the sixth time the central bank has lowered rates since September 2007 in a bid to boost the economy, which is reeling from the credit crisis triggered by a slump in the US housing market.

Here is how experts have viewed the latest Fed rate cut:

” The US is in a recession and when the largest economy in the world is in a recession, it is going to affect anybody who does business with them. But the companies who do not do business with America, they do not even know that the US is in recession. Some people are going to suffer and some are not going to.”

The big news is the return of inflation concerns to the statement, “inflation has been elevated, and some indicators of inflation expectations have risen”. When the credit crunch first hit, the Fed first tried balancing between inflation and weak growth. In January, the Fed abandoned modern inflation concerns, now it is back in again. Although, Bond Guru, Bill Gross thinks that the Fed should not be worried about inflation.

The much awaited and expected rate cute by the Federal Reserve has been announced yesterday, and the Fed cut the rate by 25 basis points. US Stock Markets reacted and the markets crashed around 3 per cent expecting bigger discount rate from Fed. Indian ADRs closed down with Satyam down 7 per cent, WIPRO and VSNL going dwown by 5 per cent, Banks like ICICI and HDFC down 2 to 3 per cent.

Asian Markets also reacted, with Hang Seng down over 3 per cent , Nikkeia down 295 points, Taiwan Index down over 170 points. It would be interesting to see how Indian Stock Markets would react to the Fed rate cut.

Sliding global markets got lifeline late on Friday when the US Federal Reserve cut its discount rate, or the rate at which it lends to member banks, by 50 basis points to 5.75 per cent.

The Fed said it did so as “the downside risks to growth have increased appreciably.

What the rate cut would doe is to allow banks and small institutions to borrow at a lower cost. This will address the liquidity issue and I think the global markets should bounce back.

Domestic stocks are likely to face another challenging session tomorrow after Asian stocks slumped to their three-month lows on Wednesday and following cues from the US, which indicated a slowdown in consumer spending.Investors are just very, very worried about what’s happening with subprime and unwinding of yen carry trade.

South Korea’s Kospi was the biggest loser, skidding 7.3% to 1,685.12, as the stock market reopened for trading after a national holiday.

In Tokyo, the Nikkei 225 index  fell 2.6% to 16,047.46 by the end of the morning session, on top of Wednesday’s 2.2% drop.

Thursday, the U.S. dollar was quoted at 116.44 yen in Tokyo, compared with 116.81 in New York late Wednesday.
Japanese banking shares also fell after reporting losses related to the U.S. subprime-mortgage market.

India is relatively less exposed to the aftermath of the US subprime mortgage collapse crisis that has sent global stock markets into a tizzy.

But it is nevertheless a wakeup call for a number of players who think that markets go only one way, cautions former IMF chief economist Raghuram G Rajan. Incidentally, Mr Rajan is tipped to head a high-level committee on Indian financial sector reforms.

Mr Rajan said domestic companies may find it harder to access external commercial borrowings (ECB) though they may not be directly impacted if international investors unwind their equity holdings in listed companies. There could be some re-pricing of Indian assets as well.

On the sentiment side, the whole episode may cast a shadow on an overall attitude towards credit and risk-taking. In the near term, the crisis would, in fact, help the Reserve Bank of India tackle the surging rupee. This, in turn, would give a breather to exporters whose rupee earnings have dropped over the last few months, he told ET.

But if the crisis does continue and causes a general economic down turn, India will not remain insulated. The biggest worry then would be of a slowdown in the economy.

“Few people realise that Indian growth has accompanied world growth. To that extent, if world growth is lower, it will affect India’s growth. Markets nowadays are so well-connected that things never really remain fully isolated anymore,” he said.

Since last week, Indian bourses have been volatile taking cue from global markets. The US subprime mortgage crisis is attributed largely to defaults arising out of loans made to customers with low creditworthiness and history of defaults. Because these mortgages are traded in the markets, it has a spillover effect on banks, hedge funds and institutional investors who participate in it.

Hedge funds, FIIs and other institutional investors, who have put money in mortgage-backed securities in the US, are usually invested in emerging markets as well. These funds offset the losses suffered due to the subprime loan crisis by divesting their portfolio in other markets.

To that extent, these investors could suck out liquidity from emerging markets like India, making them vulnerable to the global turmoil. Mr Rajan’s prescription to investors lies in an age-old adage. “Be diversified and invest for long-term,” he said.

As reported on Economictimes