CNBC's Inside India newsletter: The impact of the Fed's rate cuts on the Indian economy.

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The big story

The Federal Reserve is almost certain to start its rate-cutting cycle next week.

Central banks in emerging markets, such as India, have traditionally responded to a rate cut by loosening monetary policy in their respective regions.

However, this time, it's likely to be different.

When will India cut rates?

Recent data indicates that India's inflation rate is increasing at an unfavorable rate. In August, the headline inflation rate increased from 3.6% in July to 3.65%. Food prices, which make up a significant portion of overall inflation, were identified as a major contributor to this increase.

The Reserve Bank of India has decided not to raise interest rates, despite the latest figures being below the Indian central bank's target of 4%. Instead, markets have paused on a rate cut.

"In August, India's headline CPI inflation slightly increased, which supports our belief that the Reserve Bank will exercise caution and maintain rates unchanged during its October meeting, according to Shilan Shah, deputy chief emerging markets economist at Capital Economics. However, he added that the bank will not delay policy loosening any later than December."

Last week, Inside India reported that India's GDP growth slowed to 6.7% in the second quarter of this year, compared to 8.2% in the same period last year, putting pressure on the central bank to ease monetary policy sooner rather than later.

The Indian rupee is expected to receive immediate relief from a rate cut by the Fed, which fell to an all-time low against the greenback last week. Cutting ahead of or alongside the Federal Reserve would have risked pushing the rupee lower and increasing inflationary pressures.

Jefferies' head of India research, Mahesh Nandurkar, stated in a note to clients that interest rates worldwide have experienced a significant increase and a possible cycle reversal is foreseen in the upcoming quarters, which would provide space for the RBI to reduce benchmark interest rates in India.

By the end of next year, interest rates in India will be lower by an entire percentage point, and Bank of America anticipates rate cuts beginning in December 2024.

How will stocks react?

If there is no global recession, a risk-on sentiment may boost emerging market equities in the medium term following the U.S. central bank's rate cuts. However, the trajectory of stocks is unlikely to be a straight line.

Global equities usually perform well during rate cuts and tend to be higher 12 months after the start of easing cycles, as stated by Surendra Goyal, head of India research at Citi, in a note to clients, unless there is a significant recession or crisis.

The Nifty 50, the premier benchmark index of the Indian stock exchange, is likely to be the one exception to the rule, according to Bank of America.

If the Fed cuts rates, it may prompt the RBI to do the same, which would negatively impact earnings in the banking sector, a significant component of the index, as stated by Amish Shah, BofA's Head of India Research on Wednesday's "Squawk Box Europe."

Bank profits are typically cyclical and depend on the interest rate levels.

The decline in base rates may put pressure on banks' margins, causing BofA to be cautious about the Nifty 50's future prospects in the short term. Since banks have the largest weight in the index and account for nearly a fifth of the 50 stocks, this could have a significant impact on the overall performance of the Nifty 50.

Shah stated that large cap stocks are not overvalued, which implies that markets may remain stagnant for a while.

Need to know

Hundreds of workers at Samsung Electronics' India factory stopped working on Monday, demanding higher wages and better working hours. The Sriperumbudur plant, which produces refrigerators and washing machines, was affected. A Samsung India spokesperson said the company will address any grievances workers may have.

According to a report from Informa Connect Academy, Elon Musk, CEO of Tesla, is predicted to be the first trillionaire, while Gautam Adani, founder of the Adani Group conglomerate in India, is likely to be the second.

An Indian lender may receive a significant investment from a UAE bank, worth billions of dollars, according to UAE's ambassador to India, Abdulnasser Alshaali. This investment reflects the growing trade and cultural ties between the UAE and India, Alshaali stated. He mentioned that the UAE is the second largest export destination for India, the third largest trade partner, and the fourth largest investor. Alshaali did not reveal the names of the banks involved.

According to Upasana Chachra, the chief India economist at Morgan Stanley, India's rural demand will outpace urban consumption in the near term. Chachra notes that sales of fast-moving consumer goods are rising in rural areas. Better weather this year and softer inflation in India mean that the purchasing power of rural inhabitants is higher this year than the last. The bank revised its forecast for India's 2025 GDP to 7% from 6.8% on the back of positive economic data.

Indian companies that allocate capital well are attracting investors due to India's healthy economic growth and strong stock markets. However, this has led to expensive stocks, causing talks of a bubble. Pramod Gubbi, co-founder of Marcellus Investment Managers, shares his approach to selecting such companies.

What happened in the markets?

This week, Indian stocks are expected to experience a substantial increase in value, with the index already up by over 2% so far. Additionally, the index has surpassed the S&P 500 by 25 basis points, achieving a 16.83% increase in value year-to-date.

The Indian government bond yield has decreased slightly, falling just below the 6.80% mark.

According to Sandeep Bhatia of Macquarie Capital on Biz Focus Hub, Indian markets have not been affected by global geopolitical conflicts due to a sufficient supply of domestic liquidity.

Gurmeet Chadha, managing partner and CIO at Complete Circle, stated that India's IPO market has been "pretty hot," with "steady listings across the last couple of months." Additionally, Chadha is optimistic about India's pharmaceutical sector because it will benefit from the U.S. Biosecure Act if it passes in the Senate.

What's happening next week?

On Monday, Bajaj Housing Finance shares will be listed, while P N Gadgil Jewellers will make their debut on Tuesday.

September 16: Bajaj Housing Finance IPO

The U.S. Federal Open Market Committee meeting began on September 17, the same day as the P N Gadgil Jewellers IPO.

September 18: Day Two of FOMC meeting