US Federal Reserve Rate Cut: What It Means for Indian Stock Markets

US Federal Reserve Meeting: What to Expect

The US Federal Reserve held its Federal Open Market Committee (FOMC) meeting on December 9-10, and the outcome will be announced later tonight. Analysts expect the American central bank to cut the key interest rate for the third straight time, driven by a weak labour market.

Possible Scenarios: How Indian Stock Markets May React

There are three possible scenarios: no rate cut, a 25 basis point (bps) rate cut, and a 50 bps rate cut. Here's how market experts anticipate Indian stock markets will react in each scenario:

• No rate cut: Markets may react negatively, with increased volatility and investors moving to safer assets.
• 25 bps rate cut: This is the most expected outcome, with a 87% chance, according to CME's FedWatch Tool. Markets may see an initial relief rally, led by rate-sensitive sectors, but the sustainability of the move will depend on the Fed's tone.
• 50 bps rate cut: This is highly unlikely, but if it happens, it could trigger a sharp knee-jerk rally, followed by increased volatility.

Expert Insights

According to Shravan Shetty, Managing Director at Primus Partners, a 25 bps rate cut is expected, with a hawkish stance. Harshal Dasani, Business Head at INVasset PMS, agrees, saying that a 25 bps cut is the base case and is largely priced in by the markets.

Siddharth Maurya, Founder & Managing Director at Vibhavangal Anukulakara, believes that a 25 bps rate cut may rekindle a risk-on mood, driven by the Fed's stance. If the Fed indicates more easing in the future, it could lead to an increase in foreign inflows and liquidity in emerging markets like India.

Impact on Indian Stock Markets

A rate cut by the US Federal Reserve can impact the Indian stock market, particularly rate-sensitive stocks like IT companies, which derive a significant portion of their revenue from the North American market. A rate cut can increase discretionary spending, benefiting these companies.

This time, analysts will be watching Powell's narrative more closely than the size of the rate cut. A hawkish hold could spark a risk-off reaction, while a dovish cut could lead to a rally in high-beta stocks like banks, IT, and realty.