US Fed meeting: Will a 25 basis point rate cut cheer up the gloomy Indian stock market?

Stock Market


US Fed meeting: The US Federal Reserve is preparing for its policy meeting this week amid high expectations that the central bank will propose a 25 basis point rate cut.

The rate cut is expected to come against the backdrop of a presidential election year, further complicating the Fed’s decision-making. The two-day meeting of the Federal Open Market Committee (FOMC) starts on Wednesday, with the interest rate announcement expected on Thursday.

The Fed’s decision carries added weight in the presidential election battle, which combines economic strategy with potential political repercussions.

Although an interest rate cut usually creates optimism in the market, this 25 basis point cut may be a non-event as it has already been factored into market expectations.

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“The latest GDP data is ample evidence that the US economy is quite robust, and at the same time, inflationary pressures are subdued, with retail inflation rates within striking distance of the 2 percent target. Against this backdrop, the Fed is likely to cut the Fed Funds Rate again, probably by 25 basis points,” said Joseph Thomas, head of research at Emkay Wealth.

“While this cut may be small compared to the previous one, it likely reaffirms the fact that even the small cut is a prelude to further rate cuts in the future. The fact that the sequential growth rate is not too impressive and that unemployment levels have risen in recent months would certainly lead to further rate cuts,” Thomas said.

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US Fed Rate Cut: Impact on Indian Stock Market

Most experts believe that the Fed’s rate cut will not generate positive sentiment, and investors would focus on Chairman Jerome Powell’s commentary on evolving growth and inflation dynamics.

Recent US GDP data shows the world’s largest economy is strong, with inflation showing clear signs of easing. However, the Fed remains cautious, considering inflation risks amid the unfolding geopolitical developments. Adding to the complexity, both US presidential candidates have pledged substantial capital spending, which could drive up the budget deficit.

While a 25 basis point rate cut may not be a significant trigger for the market, an aggressive Fed could disappoint the market and increase foreign capital outflows from the Indian market.

“A 25 basis point increase will be a non-event for the market, but the overall commentary and outlook will be more important and eventful. If the Fed talks about keeping rates unchanged for its next meeting, that would have negative consequences to have.” says Shrikant Chouhan, head of equity research at Kotak Securities.

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Abhishek Jain, head of research at Arihant Capital Markets, also underlined that market sentiment is strongly in favor of a 25 basis point cut, with Fed fund futures indicating a 99 percent probability of this move.

Jain pointed out that inflation is gradually coming in line with the Fed’s 2 percent target, economic growth has remained resilient and the labor market continues to show strength, despite some signs of moderation. These positive indicators allow the Fed to proceed cautiously with interest rate adjustments.

“While another 25 basis point cut may be in the offing, market participants appear less focused on the rate cut itself and more attuned to the Fed’s guidance and commentary. Investors will scrutinize Fed Chairman Jerome Powell’s comments to gain insight into the Fed’s future policy stance. , especially in light of geopolitical tensions, election year dynamics and global economic uncertainty. In this context, a 25 basis point rate cut could indeed be a non-event for the market, as it is already largely priced in. Jain said.

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“The actual impact on market sentiment will likely depend on the Fed’s outlook on economic conditions and any guidance on the trajectory of future rate cuts. Investors will be looking for clarity on whether the Fed expects further easing or whether it will take a wait-and-see approach. see’ approach, especially as the US economy is going through a complex election year,” Jain said.

According to Piyush Mehta, small case manager and CIO at Caprize Investment, the US Federal Reserve is expected to cut interest rates by 25 basis points as non-farm payrolls and job growth rates over the past two months are lower than expected.

Mehta believes that this move is expected to be neutral and largely built into expectations. The commentary on future growth and inflation targets will outline the general outlook for aggressive or normalizing policies in the future.

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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.

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