Fed Rate Cut Impact: How Will Indian Market React?

The US Federal Reserve has cut interest rates by 25 basis points on Wednesday while lowering the target range to 3.75-4%. This marks the second time the Fed has cut rates this year, having already issued a 25 bps cut in September.

More than the rate cut, what stood out was US Fed Chair Jerome Powell's statement on how a December rate is not a foregone conclusion, which may have serious implications for the Indian market.

Wall Street certainly did not approve of the comment from Powell, with the Nasdaq falling almost 1% immediately after the announcement. Dow Jones also had a 0.75% negative reaction to the announcement and ended the day in red.

US Fed's move to cut rates by 25 bps comes on the back of elevated inflation and the US government shutdown, resulting in a lack of economic data for Fed to deduce.

Market participants will be closely watching the spillover effect of the US Fed rate cut on emerging economies, with the Indian stock market being a key focus area, especially at a time when benchmarks are recovering after a long period of consolidation.

An early indicator is the GIFT Nifty, which is trading with gains of one-fifth of a percent. Asian markets, on the other hand, are trading mixed.

While KOSPI and Shanghai have reacted positively, both Nikkei and Hang Seng were trading in the red early on.

A rate cut in the US usually translates to cheaper global liquidity, a weaker dollar and foreign investors scouring for yield. This could mean short-term impetus for the Indian markets.

This is evident in the way GIFT Nifty is trading with gains of 0.2, which indicates a relatively strong open for benchmarks.

Moreover, analysts reacting to the rate cut had suggested that the RBI could take cues from US Fed to issue further rate cuts, which in turn, could aid sentiment.

"This is a clear green lighting for RBI to cut repo rate in its next meeting in early December. Its last policy was defined as a dovish pause and that’s exactly what it did to markets by reigning in further widening of long end government yields," said Vishal Goenka, Co-Founder of IndiaBonds.com.