US Fed meet ahead: What do dimming rate cut hopes mean for Indian stock market?

US Fed meet ahead: Even though the market seems to have fairly discounted the possibility of no rate cuts in the near future, all eyes are on the US Fed policy meeting outcome this week to get a cue on what the central bank thinks about the recent macro data on growth and inflation.

The FOMC (Federal Open Market Committee) interest rate decision is due on Wednesday, May 1, followed by Fed Chair Jerome Powell’s press conference.

Also Read: Wall Street week ahead: All eyes on Federal Reserve’s interest rate decision and jobs data

The latest macro data showed inflation in the US remains sticky, and the central bank's efforts have not been able to fetch the desired results.

The US consumer price index (CPI) rose 0.4 per cent month-on-month (MoM) and 3.5 per cent year-on-year (YoY), above the Street expectations of 0.3 per cent MoM and 3.4 per cent YoY, according to data released by the Labor Department's Bureau of Labor Statistics on Wednesday, April 10.

Also Read: US Fed rate cut unlikely in June as US inflation hots up. What this means for Indian investors and what should they do?

Besides, the GDP numbers showed the economy slowed significantly during the first quarter, making the situation more complex for the Federal Reserve.

Growing at the slowest pace in two years, the US GDP increased at a 1.6 per cent annualised rate in the January-March 2024 period.

Also Read: US Q1 GDP: At 1.6%, US economy grows at slowest pace in 2 years, misses estimates on sharp uptick in core inflation

Prevailing uncertainty

There is much uncertainty on the rate cut front. The recent flare-up of geopolitical tensions and volatile commodity prices have added to concerns that inflation will not come down within the Fed's 2% target anytime soon, leading to a prolonged wait for rate cuts.

"The US Fed is watching the US economic data and Inflation. It is targeting 2 per cent inflation this year, but the rising crude oil prices are not supporting the economy. Rising geopolitical tension has not cooled down and is rising daily, which means rising commodity prices. Recently, we saw a sharp runup in commodity prices, particularly in soft commodities like cotton, corn, and soya meal and hard commodities like gold, silver, industrial metals and crude oil," Anuj Gupta, the head of commodities and currencies at HDFC Securities, observed.

While the possibility of rate cuts looks remote, the hopes of rate cuts are not gone completely. Some experts hope there could be two rate cuts this year.

"There may be a rate cut, possibly late in 2024, as they are looking for a recovery in the economy. Earlier, they were looking for three rate cuts this year. Still, we hope they will cut interest rates at least two times this year. We also expect a recovery in the global economy and political stability as all economies try to escape these issues. Recently, we saw a recovery in China, which will fuel the global economy," said Gupta.

Naveen Mathur, Director - Commodities & Currencies, Anand Rathi Shares and Stock Brokers said with the Middle East war crisis raging again, the risk of Inflationary pressure persists amid higher oil prices, which could lead to a delay in Interest rate cuts.

Mathur underscored that besides the geopolitical risks, the risk of shallower economic growth ahead is furthering the cause of 'risk aversion sentiments across markets'.

Mathur believes the global monetary policy easing cycle will likely get delayed as the growth and inflation dynamics in the US have once again bolstered the case for higher for longer rates. Although Inflation is falling, it’s not completely back to target levels.

"While Fed officials are beginning to discuss rate reductions, if inflation remains above target, they might tighten monetary policy further. Premature easing could see new inflation surprises that may even necessitate further monetary tightening. On the other side, delaying too long could pour cold water on economic activity," said Mathur.

What do dimming rate cut hopes mean for the Indian stock market?

The US central bank has been keeping rates higher for over a year. However, the longer the Fed leaves interest rates higher, the more pain could be inflicted.

"Longer elevated rates will increase borrowing costs across the economy, likely negatively impacting consumer spending, business investment, and the housing market. This year’s commodity market outlook remains highly uncertain. As consumers and businesses struggle with lingering cost pressures and high-interest rates, subdued global economic activity is set to translate into softer commodity demand," said Mathur.

However, the domestic market saw remarkable gains last financial year despite interest rates remaining high due to the robust domestic economy, strong support from domestic investors and expectations of rate cuts.

As Trivesh D., COO at Tradejini, pointed out, the Indian stock market saw a 25 per cent increase in FY24, and the outlook for the current financial year also looks favourable.

Trivesh highlighted that new investors tend to think they suffer during elevated rates, and existing investors benefit, but the truth is far from reality.

"Elevated rates can be a paradoxical situation for the market. While they might dampen overall growth and corporate earnings in the short term, they also signal the Fed's commitment to fighting inflation. This can be positive for long-term investor confidence," said Trivesh.

"For new investors, higher interest rates might make bonds and other fixed-income options more attractive than stocks. However, established investors can use market dips as buying opportunities, focusing on solid companies with strong fundamentals. In an elevated interest rate environment, a strategic approach is key. While book-building and selling during rallies can be tempting, focusing on long-term value creation is often more sustainable," Trivesh said.

India's strong growth prospects, coupled with the anticipated stability of the upcoming elections, paints a positive medium-to-long-term picture for the stock market. Domestic investor participation is also rising, mitigating some of the concerns surrounding FII outflows.

"I would recommend staying invested in quality Indian equities, using market volatility as an opportunity to build a well-diversified portfolio for the long haul," said Trivesh.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.