US Fed Rate Cut: What It Means for Indian Stock Market

US Fed Rate Cut: A Mixed Bag for India

A rate cut by the US Federal Reserve is often seen as a positive for emerging markets like India. However, history suggests that the impact may not be as straightforward. In the past, the Nifty 50 has declined in three out of five instances after a US Fed rate cut, with an average loss of 1.07%.

The Federal Reserve is expected to announce a rate cut on December 10, with traders predicting an 87.4% chance of a 25-basis-point cut. Despite this, the global temperament remains cautious, with the possibility of a hawkish commentary that could dampen market mood.

Why Fed Rate Cuts Don't Cheer the Indian Stock Market

Analysts have identified several factors that contribute to the lack of impact of Fed rate cuts on the Indian stock market. These include:

• Small rate cuts don't matter much: A 25 basis point or 50 basis point cut may not have a significant impact on the Indian stock market, as the cumulative cut and direction are more important.
• Low correlation between US and Indian markets: The correlation between the US and Indian markets is not strong and can change based on global and domestic factors.
• High-risk, low-return conundrum: Investors who react to US interest rates are usually debt investors, not equity investors, and may prefer to invest in Indian bonds rather than stocks.
• Latest rate cut signals economic stress: The current rate cuts may be a sign of economic stress, particularly given the strong markets and commodities, and may be an attempt by the Fed to mitigate the impact of tariff hikes.

According to Harshal Dasani, Business Head at INVAsset PMS, 'The Fed’s anticipated rate cut tonight is being read as a bullish cue, but the context suggests something far more complicated. Historically, the Fed eases when growth weakens, liquidity tightens, or financial conditions become strained — not when equities, real estate, and commodities hover near record highs.'

G Chokkalingam, Founder of Equionomics Research, added that 'when an aggressive rate cut happens in the US, that is a time for some problem, like Covid, the Lehman crisis, etc. So downward cycle to some extent has an impact on the Indian market because there is a problem with the US economy itself.'

As the US hikes import duty across all major products, the US consumer will be hit, impacting economic growth. This may lead to further rate cuts to prioritize growth.

Investors should exercise caution and consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.