US Fed delivers supersized 50 bps rate cut: FPI inflows to stronger INR—here’s how the verdict is ‘good’ for India

The US Federal Reserve announced its sixth policy decision for 2024 on Wednesday after a two-day Federal Open Market Committee (FOMC) meeting where it slashed the benchmark interest rate by 50 basis points (bps) or (½) half a percentage point to 4.75 per cent-5 per cent for the first time in four years, broadly in line with Wall Street estimates.

US Fed policymakers see the benchmark interest rate falling by another half-point (50 bps) by the end of this year, another full percentage point in 2025, and a final half-point reduction in 2026 to end in a 2.75 per cent-3.00 per cent range. One bps is equal to one hundredth (1/100) of a percentage point.

Also Read: US Fed lowers policy rate by 50 bps from 23-year high, signals additional 50 bps cuts; 5 key takeaways

D-Street experts said the rate cut could provide India short-term benefits, including a stronger rupee and potential capital inflows. A stronger rupee would make imports cheaper, potentially improving India’s trade balance. However, these advantages may be temporary if the US economy weakens.

The Reserve Bank of India (RBI) may follow the US Fed’s lead in cutting interest rates, but not immediately. An improved global risk sentiment could trigger a temporary rally in the Indian stock market as emerging markets (EMs) like India become more attractive to foreign investors and banks.

Also Read: S&P 500 hits record-high, Nvidia soars 5% after US Fed rate cut triggers rally in semiconductor stocks

“The Fed's rate cuts could create favourable conditions for Indian asset classes like gold, which tends to perform well during periods of monetary easing,” said Arsh Mogre, Economist Institutional Equities, PL Capital - Prabhudas Lilladher.

"Indian corporates may increase their use of cross-currency swaps to take advantage of lower US interest rates, helping to reduce borrowing costs. This is particularly relevant as the rupee strengthened to 83.6 against the dollar after the Fed’s decision, reflecting the broader market’s reaction to the cut," added Mogre.
 

Here's how the US Fed rate cut will impact India:

1.Impact on Indian stock market:

According to most D-Street experts, the domestic equity benchmarks Sensex and Nifty 50 could experience a temporary rally. In the longer term, the direction of the Indian stock market will depend largely on global economic conditions, particularly the US economy.

Also Read: How US Fed rate cut could impact the Indian stock market? Experts suggest sectors to invest in a low-rate regime

Santosh Meena, Head of Research, Swastika Investmart Ltd: "Powell indicated that inflation is under control and there are no significant concerns in the economy. While logically this move is positive for the stock market, it seems the market had already factored in the rate cut, so we might not see a sustained upward trend. 

However, there is a potential risk of profit booking, particularly in the midcap and smallcap sectors. On the other hand, financial stocks appear attractive from a valuation perspective. Nifty’s structure remains bullish if it trades above the 25,300 level. A break below this point may trigger profit booking. On the upside, immediate target levels are 25,600 and 25,921."

Pradeep Gupta, Co-founder & Vice-chairman of Anand Rathi Group: “If the US achieves a “soft landing” and avoids a recession, Indian equities may experience gradual growth. However, if the global outlook deteriorates, Indian markets—especially mid-and small-cap segments—could face increased volatility."

Amit Golia, Group CEO, MarketsMojo: "In the Indian market, Nifty has climbed 2.1 per cent over the past 10 days in anticipation of the rate cut, although market activity remained relatively flat today, with early excitement tapering off by the afternoon.

This suggests that markets may have already priced in the rate cut and are looking for other clues. Additionally, crude oil prices are trading at 52-week lows, and essential metals like iron ore and steel are hovering near multi-year lows—clear indicators of a slowing global economy.

Looking forward, markets may shift their focus to how these rate cuts affect corporate earnings and broader economic health, especially if global demand continues to weaken."

Also Read: US Fed rate cut: Indian bonds decline post decision; analysts expect RBI to remain hawkish in near-term

Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India: "Sentiment for domestic equities in India, in the near-term, will depend on the prevailing global market sentiment (especially, expectations of soft/hard landing of the US economy). The Indian economy in itself is on a solid footing and compares favourably over other EMs 

However, valuations are rich, which may limit the near-term upside unless there is a runaway global rally. Moreover, if the probability of a global hard landing rises, Indian equities could witness higher volatility.

Soft (global) landing scenario: A prudent strategy would be near-term caution, staggered investment, a preference for large caps, and a longer investment horizon. Hard (global) landing scenario: Some profit booking might be desirable, especially in mid/small caps + buy in market dips."

Yogesh Kalwani, Head - Investments, InCred Wealth: "On Indian Equity markets, given valuation is above long period averages we may see consolidation in broader markets and investor preference towards large cap and value stocks”

2.Impact on Indian bond market:

Suresh Darak, Founder & Director, Bondbazaar: “Fed rate action is a pivot which is likely to boost money flow to emerging markets and lead to increased demand across asset classes. It may lead to a rate cut cycle in India, which will result in demand and price escalation of long duration bonds”.

Also Read: US Fed Meeting Highlights: Sensex, Nifty 50 at record highs after Powell-led FOMC cuts interest rate by 50 bps

Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings & Research: “The ten-year g-sec has already slipped below 6.8 per cent in anticipation of the Fed rate cuts and may drop further, which will not only benefit the government from lower interest payouts on new issuances but also stimulate the corporate bond market.”
 

3.RBI rate cuts:

Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services: "The rate cuts by the Fed will pave the way for rate cuts in India, too. CPI inflation coming below the RBI’s target of four per cent during the last two months will facilitate rate cuts. Two rate cuts of 25 bps each are possible in India before March 2025. In brief the market scenario is turning favourable for rate-sensitives, particularly banking."

Ankita Pathak, Chief Macro & Global Strategist, Angel One Wealth Ltd: “The dot-plot indicated two more 25 bps cuts this year, taking the range to 4.25-4.5 per cent. Another 100 bps is expected in 2025. We expect that recession can still be avoided and continue to actively track economic data. Globally, emerging markets will now have more space to cut rates for their own economic stimulation. RBI is likely to deliver a cut in 2024.”

Ashwani Dhanawat, Executive Director and Chief Investment Officer, Shriram General Insurance Company: "While the Fed's pivot is significant, the RBI is unlikely to follow suit in its upcoming meeting. The RBI is expected to maintain its current stance, illustrating how central banks can operate in an asynchronous manner, responding to their unique domestic macroeconomic conditions rather than simply mirroring the Fed's actions.”

4.Greater FPI/FII inflows:

Dr. Vikas V. Gupta, CEO & Chief Investment Strategist, OmniScience Capital: “For global investors, especially in emerging markets like India, cheaper financing could boost investment flows, particularly from Foreign Institutional Investors (FIIs). Optimism should increase as the economic outlook strengthens, with potential market adjustments expected after US election results.”

Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings & Research: “Fed rate cut could lead to higher foreign capital (FPI) flows to the domestic debt market which may moderate domestic bond yields. Solid economic growth in India amidst recessionary fears in developed economies may also augment FPI equity flows, thereby facilitating the continuation of a favourable capital raising environment in the domestic capital markets.”
 

Also Read: Will RBI follow US Fed rate cut in October MPC meeting? Economists decode
 

5.Stronger INR

Vivek Iyer, Partner, Grant Thornton Bharat: "While we can expect some appreciation of the rupee, I anticipate this will be limited, with the RBI likely to intervene to keep the currency within a controlled range, crucial for maintaining financial stability."

Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings & Research: “There will be a potential impact on the INR due to the expectation of higher capital inflows. The INR has regained strength from a high of 84.0 to 83.7 over the last week, and this trend may continue in the near term. However, RBI’s intervention in the forex market might prevent any significant appreciation of the INR; by the end of the fiscal, an orderly and mild depreciation of the INR to 84.5 can be expected.”

Anil Rego- Founder and Fund Manager at Right Horizons PMS: "Global investors may seek higher returns in emerging markets like India, potentially increasing FPI and FDI. As foreign investors bring more dollars into India, the demand for the rupee increases, causing the rupee to appreciate against the US dollar. 

If the rupee appreciates due to higher capital inflows, it could lead to lower import costs, helping to reduce inflationary pressures. A US Fed rate cut can positively affect India by boosting capital inflows, enhancing stock market performance, and reducing borrowing costs. However, a stronger rupee can also lead to challenges for exports."

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.