Of late some thing which is making a buzz in the business circles is of course the Fed rate cut.So its time to have a closer look at it and understand how does it effect the economy and markets in general.

Fed rate is basically decided by Federal Bank Of America.Its the rate at which a bank or a financial institution lends money to other financial institutions.It effect not only the economy of the US but also the other major developing countries like India and China.

Now the next question that arises is why does Fed rate increase or decrease?Well its done to maintain economic stability,to promote employment,moderate long term interest rates and keep inflation in check.This time around we are expecting a rate cut as US is passing through a sub-prime crisis.A Fed rate cut would imply the rate at which banks charge interest to others would reduce and which will stimulate the economic growth.But this in long term i.e. high economic growth may lead to high inflation and economic instability.Now an increase in the Fed rate wolud automatically curb economic growth but will help in checking inflation as there will be less money in the system due to high rates charged by the bank and many projects may not see the light of the day during this period.

Lets have a look at how the Fed rate has been moving all these years.Source:Wikipedia.

The major issue is how does the fed rate effect the Indian markets and business.Generally just after Fed rates are decided The reserve bank also falls in line and accordingly increases or decreases the interest rates.If the rates go down all loans including retail,housing will become cheaper.It will also come as a breather to the Indian stock markets.The foreign fund flowing into the country also increases and which in turn boosts the markets.And more importantly the IT sector which is in a downturn due to the rising rupee will be getting more projects from US.This has been slowly becoming clear in the last week or so with the IT sector stocks going higher every day like Infosys ,TCS,Wipro,Satyam etc.But on the other hand the inflation would go high due to high fund availability in the system and thus increasing the purchasing power.

It will also be a good news for the reality sector as they would be getting the much required funds for infrastructure developments at lower rates.Apart from  the inflation the Fed rate cut will be a very good news for the Indian markets and Indian Inc.Majority of the economic forums globally are debating on the movement of Fed bank interest rates as it is the most important economic parameter apart from the crude oil prices in deciding the global GDP growth rates.

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