How can US Fed’s rate cut decision impact Indian stock markets?
The US Federal Reserve is set to hold its FOMC meeting from September 16 to September 17. Analysts increasingly expect the American central bank to cut the key interest rate this time amid weakening jobs data and rising pressure from President Donald Trump’s administration.
However, experts who spoke to Moneycontrol held different opinions regarding the quantum of rate cut that Fed chief Jerome Powell may announce this week. Some opine that a 25 bps rate cut should be expected, while others hint at a bumper 50 bps cut. Very few, however, hold the view that the American central bank may keep the rates unchanged.
Then how will Indian stock markets react? Let’s take three scenarios – no rate cut, 25 bps rate cut and 50 bps rate cut. Here’s how market experts anticipate Indian stock markets to react in each of these scenarios:
Scenario 1: Fed cuts rates by 25 bps
A 25 basis point rate cut by the American central bank is already priced in, and the Indian stock markets wouldn’t react much to it, analysts said. “A cut of 25 bps is well priced and would provide stability, as investors will take it as a cautious step,” said Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara.
“If the Fed opts for a 25 basis points cut, the reaction in India could be more balanced. As the yield spread with the US would improve, making Indian bonds relatively more attractive for global investors,” said Puneet Singhania, Director at Master Trust Group.
Scenario 2: Fed slashes rates by 50 bps
Analysts are divided on their views regarding the impact of a 50-basis point rate cut. This jumbo cut could trigger wide encouragement, as a wider yield differential could mean more incremental flows into Indian debt and equities, Singhania said.
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“In equities, the move would be viewed as somewhat supportive but not a game-changer, as investment/capex-related hopes would rise in the US, uplifting global sentiments. Also, lower US borrowing costs encourage more investments in higher growth developing markets, but tariffs create near-term headwinds. Still, in the short run, sectors with exposure to international borrowings and export-oriented industries could benefit, providing selective opportunities even if broader market upside remains capped,” he said.
Siddharth Maurya however differed, stating that a 50-bps rate cut would indeed by a game changer as it will spur world liquidity, boost FPI inflows, and sharply improve sentiment in emerging markets such as India. “The extent of the Fed’s action will determine if markets consolidate or rise vigorously,” he said.
Scenario 3: Fed keeps interest rates unchanged
Although the expectations of a no rate cut are limited, analysts note that such a move could trigger volatility. “If the Fed does not cut, there could be short-term volatility in Indian equities as liquidity issues resurface, particularly in rate-sensitive industries,” Maurya said.
Shetty agreed that any delay in the rate cut decision might surprise the market and impact in negatively. However, he added that it won’t have a large impact on the sentiment. “The tariff issue is a far more consequential parameter,” he said.
“If the Federal Reserve decides not to cut rates, Indian equities may see a short-term drag as foreign bond/debt investments continue to prefer US assets, especially with the India–US bond yield differential already very narrow. Limited incentives to shift flows toward India could weigh on both equity and debt markets,” said Singhania.
How does US Fed’s rate cut impact Indian markets?
Rate cut decisions by the US Federal Reserve impact the Indian stock market, as it weighs or boosts several rate sensitive stocks. For example, a rate cut in the US is expected to increase the discretionary spending limit, which in turn benefits IT companies which derive a significant portion of their revenue from the North American market.
Also, investors expect a rate cut in the US to pave the way for a rate cut in India. The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is set to meet between September 29 and October 1. Any rate cut announcement by the RBI directly impacts the market.
How did Indian stock markets react after last US Fed FOMC meeting?
The US Federal Reserve kept its interest rates unchanged during its last meeting in July. The central bank maintained the same level for the fifth consecutive time since December 2024 amid geopolitical tensions and tariff-related volatility.
After the FOMC meeting announcement, Indian benchmark indices Sensex and Nifty closed in the red on July 31. Sensex fell around 300 points (nearly 0.4 percent) to 81,185. Nifty 50 meanwhile closed below 24,800-level.
Notably, markets had mostly priced in a no rate cut during the earlier meeting. What impacted markets more was US President Donald Trump’s announcement to levy 25 percent tariff on India and an additional penalty for buying Russian military equipment and oil ahead of the August 1 deadline.
Traders are now pricing in a 94.2 percent chance of a 25 bps cut by the US Federal Reserve during its FOMC meeting on September 16 and 17, and a 5.8 percent chance of a 50 bps cut, according to the CME FedWatch Tool.
Also read: Markets eye RBI’s October policy decision as US Fed is set to kick off easing cycle this week