The US Federal Reserve rate cut the benchmark rate by 25 basis points in the latest monetary policy review. A split US Federal Reserve announced its third successive interest rate cut of the year, whilst indicating a potential pause in future cuts. The rate cut, reducing the range to between 3.50 percent and 3.75 percent, brings it to the lowest level in approximately three years. It matched the market predictions.
A rate cut by the central bank of the world’s largest economy has implications for markets globally and India is no different. Indian equity benchmarks, Sensex and Nifty, are already down 2.05% and 2.16% from their lifetime highs hit a few days ago. The markets have been bleeding despite a repo rate cut by the Reserve Bank of India (RBI). Continuous outflow of foreign capital, rupee depreciation, and lack of clarity on the India-US trade deal are acting as negative triggers for the stock market. What does the US Fed’s rate cut mean for the Indian stock markets?
What it means for Indian stock markets?
The US Federal Reserve on Wednesday reduced its benchmark interest rate by 25 basis points, the lowest level in more than three years. Lower US rates generally support flows into emerging markets, including India, and tend to improve business spending outlooks for sectors like IT. The equity benchmark indices staged a sharp recovery on Thursday, rising over 400 points from the day’s low in a highly volatile session marked by the weekly derivatives expiry of Sensex. The markets opened firm but soon gave up early gains and slipped into the red. Benchmark indices later bounced back as value buying emerged after three straight sessions of decline.
Most experts believe that a rate cut by the US Federal Reserve is a positive signal for the Indian markets. Vijay Singh Gour, Research Analyst at Mirae Asset Sharekhan explains that the Fed’s monetary policy influences India’s financial markets, mainly by driving capital flows. The market had anticipated a 25 basis point rate cut, which would ease global liquidity.
Such a cut is generally positive for Indian equities because lower US Treasury yields make dollar-denominated assets less appealing, encouraging Foreign Institutional Investors (FIIs) to increase allocations to emerging markets like India, thus boosting inflows and strengthening the Rupee. Besides, chairman expects economy will improve in 2026.
The 25 bps rate cut from the Federal Reserve is likely to provide some relief to the Indian currency and the FII sell off. This shall ease some pressure on Indian markets which are expecting some positive triggers,” says Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Group. “Also the Fed rate cut further opens up the space for RBI for a rate cut in the current low inflation environment to support growth.
The Fed decision, though favourable from the market perspective, is unlikely to have a significant impact on the Indian market, which is being weighed down by the sustained selling by FIIs, the huge supply of paper from IPOs and the poor earnings growth of the last six quarters.