Wed Sep 18 15:51:46 UTC 2024: ## Fed Rate Cut Decision Looms Large as Indian Markets Tread Water

**Mumbai, September 18, 2024** – Indian benchmark indices, Sensex and Nifty, remained range-bound on Wednesday, mirroring the cautious sentiment across Asian markets. Investors globally are eagerly awaiting the outcome of the two-day US Federal Reserve policy review, with analysts largely predicting a 25 basis points (bps) rate cut. However, a larger 50-bp cut is not ruled out.

The market is particularly keen on the Fed’s commentary accompanying the decision, hoping for a dovish tone signaling further rate cuts in the future. Analysts believe this would be a positive for stock investors.

“We expect the FOMC to cut the rate by 25 bps at its September 18 meeting,” said Nomura. “The dot plot will likely indicate a base case of gradual easing.”

This potential rate cut follows recent actions by the European Central Bank (ECB) and the Bank of Japan (BoJ). The ECB cut its deposit rate by 25 bps and revised its growth forecasts, while the BoJ is expected to maintain its policy rate unchanged this week.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, believes a 25 bps rate cut paired with a dovish message from the Fed would be ideal, pointing to strong retail sales data and a weakening US labor market as supporting factors. Such a move would be the first rate cut in four years.

Historically, the US Fed has announced a 50 bps rate cut 10 times in the past three decades, resulting in a median return of 1.6% for the Nifty. A 25 bps cut, however, has been followed by a modest 0.5% decline, as per Capitalmind Financial Services.

Arindam Ghosh, Co-Founder of Alphaniti Investment Advisors, believes a 50 bps cut is more likely, given the upcoming US elections and the perception that the Fed might be behind the curve. He emphasized the importance of Jerome Powell’s commentary, which will give market participants an indication of the Fed’s future direction.

While some analysts believe the rate cut cycle could lead to a market rally, others remain cautious. Nuvama warns of stretched valuations and a weakening US labor market, which may limit the upside potential.

IIFL Securities argues that the current situation is more comparable to the pre-COVID rate cut cycle of 2019-20, where equities rose both before and during the rate cuts. They predict Nifty EPS growth of 10-11%, which could be further supported by softening commodities.

The Indian indices, including the Sensex and Nifty, responded positively to rate cuts during the 2019-20 period. The S&P 500 and Nifty rose 12% and 5%, respectively, in the six months leading up to the cuts, and advanced further by 15% and 10%, respectively, during the rate cut period.

The upcoming Fed announcement is expected to have a significant impact on global markets, including India. Whether the rate cut will trigger a sustained rally or lead to continued market volatility remains to be seen.

Read More