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Benchmark stock indices plunged on Thursday, aligning with global trends after the US Federal Reserve reduced key interest rates by 25 basis points.
The S&P BSE Sensex dropped 925.21 points to 79,256.69, while the NSE Nifty50 fell 309.75 points to 23,889.10 by 9:25 AM. Earlier, the Sensex had declined over 1,100 points but recovered slightly.
Dr. V K Vijayakumar of Geojit Financial Services attributed the fall to the Fed's guidance of fewer rate cuts in 2025, which contradicted market expectations. Despite the rate cut aligning with predictions, the forecast of only two cuts spooked investors, triggering a Wall Street sell-off.
India VIX rose 3.70%, while broader indices like Nifty Midcap100 and Smallcap100 declined 0.84% and 1.02%. Sectoral indices also saw losses, with Nifty Metal dropping 1.67% and Nifty Financial Services down over 1.3%. Vijayakumar suggested this dip offers opportunities for long-term investors focusing on fairly valued large-cap stocks.
On Thursday, the Indian rupee fell below 85 to the US dollar for the first time, following the US Federal Reserve’s cautious stance on future rate cuts, which unsettled financial markets. The Fed reduced interest rates by 25 basis points, setting the Fed Funds rate at 4.25-4.50%. By 11:00 am, the rupee traded at 85.06 per dollar, while the 10-year government bond yield rose to 6.79%.
A state-owned bank dealer remarked, “The Fed's tone suggests only two rate cuts in 2025, keeping pressure on the rupee.” Fed Chair Jerome Powell emphasized a cautious approach to further easing, citing sideways inflation trends and noting that the latest decision saw one dissenting vote.
The rupee's swift decline from 84 to 85 occurred over two months, compared to 14 months for the drop from 83 to 84, Reuters reported. Analysts foresee tightening FX intervention costs and challenges in upcoming policy decisions.
India is projected to be the largest recipient of remittances in 2024, with inflows estimated at $129 billion, surpassing Mexico, China, the Philippines, and Pakistan, according to a World Bank economists’ blog. This surge is attributed to improved job markets in high-income nations, particularly within OECD countries. Remittance growth in 2024 is forecasted at 5.8%, a significant rise from 1.2% in 2023.
Officially recorded remittances to low- and middle-income countries (LMICs) are expected to hit $685 billion, continuing to exceed other financial inflows like Foreign Direct Investment (FDI). Over the past decade, remittances grew by 57%, while FDI fell by 41%. Countries are encouraged to utilize these resilient inflows for poverty alleviation, health, education, and financial inclusion.
South Asia is anticipated to see the highest regional growth in remittances at 11.8%, led by India, Pakistan, and Bangladesh, driven by robust migration and economic disparities.
The Federal Reserve revised its monetary policy toolkit on Wednesday, cutting the reverse repo facility rate more sharply than the federal funds rate. The reverse repo rate was reduced by 30 basis points to 4.25%, while the federal funds target range dropped by 25 basis points to 4.25%-4.5%.
This adjustment aims to encourage liquidity movement away from the reverse repo facility, used mainly by money market funds to park excess cash. The overnight reverse repo facility (ONRRP) rate provides a soft floor for short-term interest rates and acts as a collateralized loan to the Fed.
By reducing the ONRRP rate, the Fed seeks to make the facility less appealing, prompting users to explore higher returns in private markets. This could align with ongoing efforts to shrink the Fed's balance sheet, which has already fallen from $9 trillion to $7 trillion. Policymakers anticipate reverse repo balances nearing zero, signaling the final stage of pandemic-era monetary support.
