US Fed meeting: Will a 25 bps rate cut cheer India’s stock market gloom?

US Fed meeting: That US Federal Reserve prepares for its policy meeting this week, expectations are high that the central bank will propose a 25 bps rate cut.

The rate cut is expected to come amid a presidential election year, adding a layer of complexity to the Fed’s decision-making process. The two-day meeting of the Federal Open Market Committee (FOMC) starts on Wednesday and the rate announcement is expected on Thursday.

The Fed’s decision weighs extra against a high-stakes presidential race, combining economic strategy with potential political repercussions.

While a rate cut usually infuses the market with optimism, this 25 basis point cut may be a non-event as it is already factored into market expectations.

“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 within a stone’s throw of the 2 percent target rate. Against this backdrop, the Fed is likely to cut the Fed Funds rate again, probably by 25 bps,” said Joseph Thomas, head of research at Emkay Wealth.

“While this cut may be small compared to the last one, it is likely to reaffirm that even a small cut is a prelude to further rate cuts in the future. That the sequential growth rate is not too impressive and that the unemployment level has increased in recent months would certainly trigger further rate cuts,” said Thomas.

US Fed Interest Rate Cut: Impact on Indian Stock Market

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

Recent US GDP data signals that the world’s largest economy is strong, with inflation showing clear signs of easing. However, the Fed remains cautious, mindful of inflation risks amid ongoing geopolitical developments. Adding to the complexity, both US presidential candidates have promised substantial capital spending, which could lead to an increase in the fiscal deficit.

While a 25 bps rate cut may not be a significant trigger for the market, a Fed call may disappoint and deepen the outflow of foreign capital from the Indian market.

“A 25 basis point hike will be a non-event for the market, but the overall commentary and outlook will be more important and eventful. If the Fed is talking about keeping rates unchanged for the next meeting, then that would have negative implications.” , said Shrikant Chouhan, head of equity research at Kotak Securities.

Abhishek Jain, head of research at Arihant Capital Markets, also pointed out that market sentiment strongly favors a 25 bps cut, with Fed funds futures indicating a 99% probability of such a move.

Jain pointed out that inflation is gradually aligning 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 rate adjustments.

“While another 25 bps cut could be on the horizon, market participants appear less focused on the rate cut itself and more attuned to the Fed’s anticipated guidance and comments. Investors will be scrutinizing Fed Chairman Jerome Powell’s remarks for insights into the Fed’s future policy stance. , especially in light of geopolitical tensions, election year dynamics and global economic uncertainty. In this context, a 25bps rate cut may indeed be a ‘non-event’ for the market as it has already been largely priced in.” Jain said.

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

According to Piyush Mehta, small case manager and CIO at Caprize Investment, with non-farm payrolls and job growth data for the past two months coming in lower than expected, the US Federal Reserve is expected to cut rates by 25 bps.

Mehta believes that this move is expected to be neutral and is largely built into expectations. Commentary on future growth and inflation targets will frame the overall outlook for future aggressive or normalizing policy.

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