Indian markets generally cool to US Fed rate cut in the past

The Federal Reserve, the centrla bank of the US, on Wednesday reduced its benchmark interest rate by 50 basis points (or 0.5%), marking the first decrease since 2020, as the central bank started to unwind the restrictive policies it had put in place to address inflation.

The Federal Reserve's benchmark policy rate has remained in the 5.25%-5.50% range for 14 months. This is longer than three of the last six periods during which the Fed kept rates steady.

Does it shape the market trend?

Indian investors are closely watching the decision, as it is expected to shape the market trend for the day. Experts suggest that a 50 bps rate cut could boost market sentiment.

However, a recent report by Capitalmind Financial Services highlights the resilience of Indian markets over the past two decades, regardless of the Federal Reserve's monetary policy stance. While Fed rate hikes typically lead to a negative day in equity markets, they are often followed by a rebound the next day. The report notes that over the last 20 years, the Nifty has consistently either outperformed or, at the very least, kept pace with the S&P 500 in local currency terms.

Fed's 6 alternating cycles

The US Federal Reserve has undergone six alternating cycles of easing and tightening in the past 34 years. For Indian markets, the most favourable period was the Fed's easing cycle from July 1990 to February 1994, during which the Nifty surged by 310%. The tightening cycle from June 2004 to September 2007 also proved beneficial, with a 202% gain. However, the Nifty saw negative returns during two tightening phases: from February 1994 to July 1995, when it dropped 23%, and from March 1997 to September 1998, with a 14% decline.

“With global inflation and growth trends showing signs of moderation, we may be nearing the end of this cycle of elevated interest rates. Historically, US rate cut cycles have led to negative equity returns in the US, with Indian markets (Nifty 50 TRI) also seeing similar results in two of the last three instances,” pointgs out Vaibhav Porwal of Dezerv.

The Sensex and the Nifty traded within a narrow range on Wednesday, mirroring the performance of their Asian counterparts, as investors worldwide awaited the results of the Fed meeting.

According to Siddhartha Khemka of Motilal Oswal Financial Services Ltd, the Nifty consolidated after making a fresh high and closed with a loss of 41 points at 25,378 levels. The broader market witnessed profit booking for the second consecutive day with the Nifty Midcap 100 and the Nifty Smallcap 100 down -0.6%/-0.4% respectively. Barring Banks and Financials, all sectors ended in the red.

`It could bring some cheer to market sentiment'

“A 50 bps rate cut by the Fed could bring some cheer to market sentiments. Hence, we expect the market to remain volatile in the near term with rate-sensitive sectors in focus,” said Mr Khemka.

Meanwhile, analysis of options data suggests that this consolidation may persist, with the 25,500 call strike exhibiting significant open interest of approximately 47 lakh shares. On the other hand, the 25,400 put strike shows substantial open interest of around 45 lakh shares.

(By arrangement with livemint.com)