Global Rate Cuts: A Boost for Equities, But What's Next for Investors?

Global Interest Rate Cuts: A Macro-Favourable Environment for Equities

The Reserve Bank of India (RBI) and the US Federal Reserve have cut benchmark interest rates, creating a favourable environment for equities. The RBI cut the repo rate by 25 basis points to 5.25%, while the US Federal Reserve cut the federal funds rate to 3.50%–3.75%, its lowest level since 2022.

Positive Triggers for the Market

Rate cuts are positive triggers for the market, as they make borrowings cheaper and liquidity easier, improving the profitability of companies. However, the markets have given a measured response to the recent rate cuts. For example, the Sensex rose by 0.52% after the RBI cut rates, but declined for the next three consecutive sessions, falling overall by 1.5%.

Challenges Facing the Indian Stock Market

The Indian stock market remains volatile due to two major headwinds: the delay in the India–US trade deal and sustained selling by foreign institutional investors (FIIs). Despite rate cuts and a healthy earnings outlook, markets remain range-bound because several macro headwinds continue to overshadow the positives.

Investment Strategy for Gold and Equities

Experts recommend focusing on fundamentals and valuations. Valuations of mid and small-cap segments are still high, and they need strong earnings growth to justify the valuation. Investors should focus on large-caps and select mid and small-caps for the long term. Gold should be maintained as a hedge against global uncertainties.

Expert Insights

• Gautam Kalia, Head - Investment Solutions and Distribution, Mirae Asset Sharekhan: Easing inflation, RBI’s pro-growth stance, GST reforms, and expected improvement in liquidity would aid market activity. Large-cap equities and select mid and small-cap ideas remain preferred choices for long-term investment.
• Naveen Vyas, Senior Vice President at Anand Rathi Global Finance: A lower interest-rate cycle generally enhances the relative attractiveness of emerging markets like India for foreign investors. Domestically, interest-rate–sensitive consumption sectors such as housing, consumer durables, and automobiles are expected to benefit from softer borrowing costs.
• Ritesh Taksali, Chief Investment Officer at Edelweiss Life Insurance: Current market valuations present a constructive backdrop for long-term equity investors. The Nifty is trading at nearly 21.7P/E trailing earnings, below its 10-year historical average, indicating that valuations are reasonable.

Investors should focus on quality equities with a long-term perspective and maintain some allocation to gold as a hedge against global uncertainties.