Indian Stock Market: US Fed Rate Cut on Government Bond Yields: Five Key Concerns Investors Shouldn’t Overlook

Indian stock market: The Indian stock market correction, which began in October last year, continues to be brutal as a confluence of factors – including high valuations, weak quarterly earnings, a strengthening US dollar, rising bond yields and slowing economic growth – continue to keep investors nervous. .

On a monthly scale, the benchmark index, Nifty 50, has fallen since October. It is down 11 percent from its all-time high of 26,277.35, which it reached on September 27 last year.

The short-term outlook appears challenging, with several headwinds ahead. However, experts remain optimistic about the prospects of the Indian stock market in the medium to long term.

“The market remains under pressure, with even small pullbacks triggering selling pressure. In the absence of clear signs of a trend reversal, especially in the banking index, traders are advised to use rebounds as shorting opportunities,” said Ajit Mishra, SVP Research. at Religare Broking, said.

“Prudence should remain a priority, with an emphasis on robust risk management. Additionally, as earnings season kicks off, erratic market swings are likely to increase. Adopting a hedged approach and maintaining disciplined position sizing is recommended to navigate the current conditions to navigate.” Mishra said.

5 Top Concerns for Indian Investors

Stock market experts highlight five key concerns that Indian equity investors should not overlook.

1. The interest rate path of the US Federal Reserve

Hopes for further interest rate cuts by the US Fed are diminishing. The minutes of the US central bank’s latest policy meeting show that policymakers see little chance of further interest rate cuts as they expect inflation to rise in 2025.

Recent US macro data shows that the US economy remains strong, further dampening the prospects for rate cuts. Meanwhile, U.S. job growth exceeded expectations, raising doubts about Fed rate cuts in the near future.

Data shows that jobs added 2,56,000 in December, significantly more than the 1,60,000 expected by economists in a Reuters poll. The unemployment rate fell from 4.2 percent to 4.1 percent.

2. The Trump factor

Donald Trump will take office on January 20. His policy on tariffs will be a key factor determining the direction of the global market. There is currently great uncertainty about Trump’s policy in the market.

“Global uncertainty concerns the possible actions of President-elect Trump. Trump’s statements – raising tariffs, curbing inflation and cutting taxes – are inflationary. Hence, he is unlikely to speak except on tax cuts,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, observed.

“Markets have partially discounted Trump’s threats, as evidenced by the rise in the dollar index to 109 and the rise in 10-year US Treasury yields to 4.79 percent. If Trump prefers to negotiate after taking office, the dollar index and bond yields could start to rise. From the Indian market perspective, this can be positive as FIIs will pause sales in such a scenario,” said Vijayakumar.

3. Rising yields on US government bonds

A sustained rise in US Treasury yields amid growing expectations of a narrower rate cut path by the Fed has been one of the key reasons behind the heavy outflow of foreign capital from the Indian market. So far in January, foreign portfolio investors (FPIs) have sold Indian equities at close to value ₹21,350 crore, after a sell-off of approx ₹46,000 crore in November and a staggering one ₹1,14,446 crore in October.

The yield on US ten-year government bonds recently rose to 4.79 percent, the highest level since November 2023.

When US bond yields rise, FPIs sell riskier stocks from emerging markets like India and invest the money in US government bonds as they offer virtually risk-free returns. In the case of India, the sell-off this time is steep due to the high valuation of the Indian stock market.

4. Earnings growth

After disappointing first and second quarter results, all eyes are on India Inc.’s continued third quarter profits. Experts do not expect an immediate recovery. Still, they expect some sectors, such as IT, to show some recovery.

“For the Indian market to recover, we need positive data on the growth and earnings front. Third quarter results may be slightly better, but the growth recovery will be slow and gradual,” Vijayakumar said.

5. The macro photo

The Indian economy has seen a moderation in the last three quarters. According to the official release of the Ministry of Statistics and Program Implementation (MoSPI) on Tuesday, January 7, India’s gross domestic product (GDP) is expected to grow by 6.4 percent in the financial year 2024-25. This marks the lowest point in four years. and a decline from 8.2 percent growth in the 2024-2025 financial year.

Recently, the State Bank of India (SBI) revised its forecast for India’s GDP growth in FY25 to 6.3 percent, which is slightly lower than the National Statistical Office’s (NSO) estimate of 6.4 percent.

Moreover, according to a United Nations report, the Indian economy is expected to grow by 6.6 percent by 2025.

Experts note that the slowdown in growth is among the biggest concerns for the market. Many sectors are showing single digit growth. Recovery of urban consumption and increase in public investment are the key factors determining the growth of the Indian economy.

Apart from the above-mentioned factors, disappointment over the 2025 Union Budget, increased inflation rates and a possible escalation of geopolitical tensions also remain among the key concerns for investors.

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