The Indian stock markets are expected to respond positively to signals from the FOMC regarding a potential interest rate cut in September. Analysts are optimistic that the Federal Reserve’s decision to maintain the benchmark interest rate at 5.25-5.50% for now, while hinting at a rate reduction soon, will boost market sentiment globally, including in India.
For the past year, the U.S. central bank has held interest rates steady, a marked shift from the aggressive rate hikes seen between March 2022 and July 2023, when the Fed increased rates by a total of 525 basis points. These hikes were part of an effort to control inflation, which had soared to multi-decade highs due to the combined impacts of the Ukraine-Russia conflict and lingering COVID-19 restrictions.
Now, with U.S. retail inflation showing signs of stabilizing and edging closer to the Fed’s 2% target, market participants are anticipating that the Fed will begin to lower interest rates as early as September 2024. The next FOMC meeting, scheduled for September 17-18, will be closely watched for any official confirmation of this anticipated policy shift.
In India, market experts are projecting that the news of a potential rate cut could lead to a positive reaction, particularly in the Nifty index. Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, suggests that the Fed’s indications of a possible rate cut could help propel the Nifty beyond the 25,000 mark, a level it has been flirting with in recent sessions.
This should have a positive impact on the Indian market, which has been hovering near the magical 25K on Nifty for the last few days. We see a high probability of Nifty opening with a gap-up post-FED and continuing its march beyond 25K levels.
Amit Goel
The expectation of a rate cut is seen as a key driver of investor sentiment, which has been somewhat cautious in recent months. The possibility of a more accommodative monetary policy from the world’s largest economy is likely to be viewed as a green light for risk-taking, particularly in emerging markets like India, where equities could see a renewed influx of capital.
Suman Bannerjee, Chief Investment Officer at Hedonova, however, cautions that while the overall market outlook appears positive, investors should be prepared for potential volatility.
Investors should prepare for potential volatility, as the Fed’s commentary on the future economic outlook will be crucial in shaping market expectations.
Suman Bannerjee
This suggests that while the market may initially respond positively, there could be fluctuations based on the specifics of the Fed’s future guidance.
Ajit Mishra, Senior Vice President of Research at Religare Broking Ltd, also weighed in, indicating that the Indian markets are likely to extend their gains if the Fed’s signals materialize into actual policy actions.
Mishra believes that breaking through the 25,000 barrier on the Nifty index could set the stage for further upward momentum. He advises traders to focus on strategic stock selection, emphasizing the importance of identifying companies with strong fundamentals, robust earnings potential, and favorable technical setups in the current environment.
The broader market mood appears to be one of cautious optimism, with analysts generally agreeing that the prospect of a Fed rate cut is likely to be a net positive for Indian equities. However, the exact trajectory will depend on a range of factors, including global economic data, the Fed’s communications in September, and the response of other central banks around the world.
As the countdown to the next FOMC meeting begins, market participants will be closely monitoring any developments that could impact the Fed’s decision-making process. Until then, the Indian markets are expected to remain buoyant, with a potential breakout on the Nifty index on the horizon, fueled by the prospect of easier monetary policy in the U.S. and the positive ripple effects it could have on global financial markets.
