US Fed rate cut decision: How will it impact Indian stock markets?

The Sensex declined over 1,100 points and the Nifty fell below 24,000 after the US Federal Reserve's decision to cut interest rates by 0.25% to 4.5%, coupled with a hawkish outlook on future rate adjustments.

While the near-term outlook appears volatile, experts advise caution and a focus on fundamentally strong stocks.

Benchmark stock market indices have been under pressure over the past few sessions, extending losses as global cues remain weak. In early trade today, the Sensex plunged over 1,100 points, while the Nifty slipped below 24,000, with all broader market indices trading in negative territory.

The decline follows the US Federal Reserve’s decision to cut interest rates by 0.25% to 4.5%, coupled with a hawkish outlook on future rate adjustments.

The Federal Reserve's decision came with a revised 2025 inflation forecast of 2.5% and a core inflation estimate of 2.8%. GDP growth for 2024 was upgraded to 2.5% from the previous 2% projection. This adjustment underscores the Fed's "higher-for-longer" approach to combat persistent inflation.

The announcement led to a global market sell-off, with the Dollar Index surging to a two-year high. This strengthened the US dollar, making dollar-denominated assets more attractive while pressuring emerging markets like India.

Palka Arora Chopra, Director at Master Capital Services Ltd., highlighted the global fallout: "The US Federal Reserve's recent 0.25% interest rate cut, accompanied by their indication of a more measured pace of future reductions, has triggered a wave of uncertainty across financial markets. The Dollar Index surged, reflecting the market's reaction to the Fed's hawkish stance.”

The strengthened US dollar has led to concerns about foreign portfolio investment (FPI) outflows from Indian equities. A weaker rupee adds to India’s trade deficit woes and raises inflation risks due to higher import costs.

Swapnil Aggarwal, Director at VSRK Capital, warned of potential outflows: "This rate cut could make Indian assets less attractive to foreign investors, potentially leading to capital outflows. A prolonged depreciation of the rupee could exacerbate the trade deficit and heighten inflationary pressures in the future.”

Sectors such as real estate, autos, and capital goods, which are sensitive to interest rates, are likely to face challenges. However, IT and export-driven industries may benefit from a stronger dollar.

Justin Khoo, Senior Market Analyst - APAC at VT Markets, explained the potential market dynamics: "US stock markets may see declines, particularly in tech and growth sectors, as higher rates reduce the present value of future earnings. Interest-sensitive sectors like real estate and utilities could also face further challenges."

While the near-term outlook appears volatile, experts advise caution and a focus on fundamentally strong stocks. Aggarwal advised: "Investors should avoid panic selling during these fluctuations and focus on fundamentally strong securities with minimal exposure to global factors.”