For the first time since 2020, the US Federal Reserve has reduced its key interest rate by 50 basis points, to 4.75-5%. This deduction has been decided to address the slump in economic growth and alleviate inflation in the US. The measure has stirred concerns surrounding the stability og the US economy and is expected to cause consequences impacting global markets, including India. Although, on Thursday, the Indian markets started on a high note with the Nifty index outpacing the 25,500 level for the first time, it is still uncertain whether this skyward trend will continue.
Let’s analyze the impact of this reduction in interest rates on the Indian stock market.
India’s economy could significantly gain from a robust rupee and surging capital inflows when considered for the short term. A stronger rupee can bring down the expense of imports and improve the country’s trade balance. Nonetheless, these advantages can be felt only for a short period if the US economy remains fragile.
According to experts, the Reserve Bank of India (RBI) might evaluate the reduction of interest rates to line up with worldwide trends. Some analysts predict that the RBI could reduce rates by 25 to 50 basis points before 2025, depending on the trajectory of the US economy and the adjustments made by global investors.
It is anticipated that the Reserve Bank of India may not immediately follow the decision made by the US Federal Reserve. Although India’s inflation is below the RBI’s target rate of 4%, uncertainties and worries about food prices continue to haunt it. Nevertheless, enhanced worldwide market sentiment could kindle a positive movement in Indian markets. The founder and Faund Manager at Green Portfolio PMS, Divam Sharma, highlighted that “While the RBI remains cautious and may not align its actions with those of the US Fed, the overall uplift in global sentiment could boost market performance, making emerging markets like India more appealing.”
According to experts, the recent US interest rate cut can kindle short-term fluctuations in the Indian stock market, as these rate cuts are often known to impact global markets and investor sentiments. Nevertheless, India’s robust economic dynamics could garner significant foreign investments over the long term, possibyly proving advantageous to the stock market.
The Director of VSRK Capital, Swapnil Aggarwal, remarked,” The Indian market might face some volatility in the short term, but its promising economic prospects could still draw foreign investment, positively influencing the stock market in the medium to long term."
Indian exports, particularly the IT services dependent on the US market, can experience a vital impact due to the US Federal Reserve rate cuts. A slack in the US economy can lower the demand for Indian goods and services, influencing export earnings. Affarwal pointed out that a reduction in US demand could trigger a negative impact on India’s export performance, specifically in IT services.
How Indian financial markets react to the US Federal Reserve’s latest rate cut hugely depends on the performance of financial and banking stocks. Usually, the rate reductions prove advantageous to the markets, although, a weighty cut like this could also signal substantial economic concerns, possibly sabotaging investor confidence.
The Director of Master Capital Services Ltd, Palka Aroara Chopra, mentioned, “A 50 basis points cut reflects serious economic worries. While rate cuts generally support market growth, such a substantial reduction might be interpreted as a sign of economic distress, potentially affecting investor sentiment negatively."
The ongoing market volatility calls for the need for caution among investors. Sectors like Pharmaceuticals and Fast-Moving Consumer Goods (FMCG) are considered to be safer investment options during an uncertain period like this. To add up to your stable investments in your portfolio, you can also consider investing in precious metals like gold and silver.
The Head of Market Perspectives and Research at SAMCO Securities, Apurva Sheth, pointed out, “Markets will need time to adjust to the rate cut. We recommend focusing on defensive sectors like FMCG and Pharma, and including precious metals until market conditions become clearer."
“The rate cut boosts investor confidence and supports stock market momentum. It may also prompt the Reserve Bank of India (RBI) to consider a similar move, particularly as the domestic economy recovers. We remain positive on infrastructure, manufacturing, and FMCG sectors due to improving economic conditions", further added SVP-Retail Research at Religare Broking, Dr, Ravi Singh.
The performance of the US economy will have a significant impact on the future of the Indian stock market. Indian equities could experience gradual gains given that the US goes easy on and successfully avoids recession. However, exacerbating worldwide economic conditions can cause surging volatility, especially in mid and small-cap stocks.
The Managing Director and Senior Advisor at Julius Baer India, Unmesh Kulkarni, stated, “Short-term sentiment for Indian equities will depend on global market trends, notably the US economy's trajectory." "While the Indian economy is strong, high valuations could limit gains unless there's a global rally. A soft landing suggests cautious investment in large caps, while a hard landing may lead to profit-taking in mid and small caps", he further added.
