US Fed rate cut: Will a 25 bps rate cut bring in ’achhe din’ for the Indian stock market?

US Fed rate cut: The US Federal Reserve is poised to cut its benchmark policy rate for the first time since March 2020, responding to signs of an economic slowdown and easing inflation. For the past 14 months, the central bank has maintained interest rates between 5.25 per cent and 5.50 per cent to curb inflation and bring it closer to its 2 per cent target. While inflation remains above this goal, it has moderated significantly. Meanwhile, a cooling job market has further opened the door for the Fed to consider reducing rates.

The Federal Open Market Committee (FOMC) will meet on September 17-18 to decide monetary policy. Now, it looks almost certain that the Fed will announce a 25 bps rate cut.

Fed rate cuts are good news for markets globally. They are also important for emerging markets like India as they promote the inflow of foreign capital. At a time when the Indian stock market is at a record high, investors expect the Fed rate cut to give the market a solid boost.

'Achhe din' ahead for the Indian stock market?

While a Fed rate cut is generally seen as positive news, a 25 bps cut is unlikely to boost the Indian stock market, as it has already been factored in. Markets typically discount key developments well in advance, often leaving little room for movement when the event actually occurs.

For example, the market continued rising during the Fed's rate hikes in 2022. Despite the rising rates, US and Indian markets climbed, driven by expectations that rates would soon peak, followed by eventual rate cuts.

Hence, experts suggest that a 25 bps rate cut may not bring 'Achhe Din' to the market and could instead turn out to be a non-event. However, a 50 bps cut has the potential to generate positive market sentiment and drive a more noticeable impact. More than the rate cut, the focus would be on the signals of how soon the Fed cut rates by 100 bps.

"A 25 bps rate cut would be a non-event for the market because it has been fully discounted. When such things unfold on expected lines, the market tends to respond lukewarm," said G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd.

"In case of a more than 100 bps rate cut cumulatively, we may see a good FII inflow. The market will look for signals on how soon the Fed will cut rates by 100 bps. In my view, the Fed may cut rates by 100 bps this year because oil prices have fallen despite the war in the Middle East, which indicated a fall in demand and is the biggest indicator of deflationary trends in the economy," Chokkalingam said.

Experts believe the rate cut trajectory will influence the market movement more than the immediate rate cut. Fed's indication of a substantial rate cut cycle could be a significant catalyst for the market.

"The trajectory of the rate cycle will drive the Indian equity market in the medium term. Markets are focusing more on the terminal rate at the end of the rate cut cycle than the quantum of the immediate rate cut," said Pankaj Pandey, the head of retail research at ICICI Direct.

"Globally, capital markets have discounted 25bps rate cut with CME Fed Watch tool Fed indicating the probability of 25bps rate at 100 per cent. In fact, it is pertinent to note that the probability of a 50bps rate cut has increased to 60 per cent compared to 30 per cent a week before. In total, the market is discounting a 250bps US Fed rate cut till 2025. As long as that guidance is maintained, the Indian market is well-placed from a liquidity and rate cycle perspective," said Pandey.

Focus less on the Fed and more on the fundamentals

While the rate cut cycle is to start, experts say investors should focus more on fundamentals and less on such triggers.

Equities have witnessed healthy gains over the last four years, so investors should consider the fundamentals while picking stocks.

“Investors should follow an asset allocation-based strategy and use abnormal movements in any asset class to rebalance and take advantage of any drawdowns in one relative to the other,” Pramod Gubbi, the co-founder of Marcellus Investment Managers, told Mint.

“Given that equities have done well over the past four years, it is likely that equities would have risen as a proportion of the portfolio and, hence, should be rebalanced downwards. Investors should resist acting based on interest rates, elections, etc.,”Gubbi said.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.