On September 18, the US Federal Reserve delivered what markets globally had been expecting – a significant rate cut after over four years. Emphasizing that the world’s largest economy was in good shape and inflation was on a downward trend, the US Federal Reserve cut the benchmark interest rate by 50 basis points, giving a boost to markets globally. Stocks rose to record highs but faced profit-taking due to high valuations. Nevertheless, the Fed’s move is expected to bode well for emerging markets like India as it has indicated that rate cuts will continue until 2026.

The next meetings of the Federal Open Market Committee (FOMC) are scheduled for November 6-7 and December 17-18 this year. The Fed has forecast a total rate cut of another 50 basis points by the end of 2024 and sees scope for a full percentage point cut in 2025 and half a percentage point in 2026.

The start of the interest rate cut cycle is positive for the markets. US Dow Jones futures rose by one percent, while markets in Europe and Asia rose by as much as two percent.

Indian equity market benchmarks Nifty 50 and Sensex rose one percent each during the September 19 session to hit fresh record highs of 25,611.95 and 83,773.61, respectively. In contrast, BSE midcap and smallcap indices rose as much as 2 percent, mainly due to valuation concerns in some sectors.

“The midcap and smallcap segments, especially sectors like defence, railways and capital goods, have performed exceptionally well over the last two-three years and are now witnessing a sharp correction. Valuations have been a cause of concern in the broader market for a long time, yet these stocks continued to gain. However, there always comes a point when market euphoria wears off,” said Santosh Meena, Head of Research at Swastika Investment.

“Domestic institutions have also shown signs of caution and maintained significant cash reserves at high levels. I believe this correction could extend further, which presents a good buying opportunity for long-term investors in quality stocks,” Meena added.

The US Federal Reserve’s interest rate cut and its impact on the Indian stock market

The Fed cut interest rates and adopted a dovish stance, which bodes well for emerging markets like India. With interest rates expected to fall by over 200 basis points over the next two years, India is likely to see a sustained inflow of foreign capital as the country’s robust economic growth attracts investors.

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Servicesnoted that the Fed’s move was positive from the Indian market’s perspective on two counts.

First, foreign institutional investors (FIIs) are wary of investing in India because of its high valuation, but they have no other choice. Moreover, the policy rate is expected to be around 3.4 percent by the end of 2025, which means more money will flow into emerging markets, and India has the best prospects.

Second, the Fed’s move will pave the way for RBI to cut interest rates, with two rate cuts of 25 basis points each possible by the end of March next year.

“A rate cut by the RBI in October is possible. Two independent members of the Monetary Policy Committee (MPC) have already spoken in favour of rate cuts as the signals for the first quarter are not very positive. Earnings growth in the first quarter was not impressive and some downgrades indicated weakness in certain areas of the economy. Consumer price inflation has eased significantly and is expected to be around 4 per cent,” Vijayakumar said.

Interest rate cuts in the US are positive for the Indian currency as they weaken the dollar somewhat, which is positive for Indian markets in general. Experts say continued buying by foreign investors and a robust macroeconomic outlook in India could support the stretched valuation of the Indian stock market.

What should investors do?

Experts believe investors should stick to large caps, avoid overpriced mid and small caps and focus on sectors like FMCG, pharma and private banks.

“Investors’ strategy should be to stick with large caps, especially fairly valued banking stocks. They can also look at pharma and FMCG stocks and avoid overpriced mid and small caps. The SME segment should be avoided like the plague. The IT sector’s outlook will depend on the second quarter results, what management says about demand and the trends in the US economy,” Vijayakumar said.

Jitendra Gohil, Chief Investment Strategist at Kotak Alternative Asset Managersis positive for NBFCs, real estate and consumer-oriented sectors.

“Rural consumption is recovering well as rainfall has been higher than expected and the promotional offers during the festive and wedding seasons could boost consumption in the coming months. Valuation in the banking sector is relatively attractive and we believe long-term buying opportunities have emerged. There could be profit-taking in the IT sector after this rally. Pharmaceuticals remains our high conviction sector as the developed market is facing significant cost pressures. In the short to medium term, we prefer large caps over mid and small caps,” Gohil said.

Ravi Singh, SVP of Retail Research at Religare Brokeris positive on the infrastructure, manufacturing and FMCG sectors due to improved economic conditions.

Neeraj Chadawar, Head of Basic and Quantitative Research at Axis Securitiesbelieves that large private banks, as well as the telecommunications, consumer, IT and pharmaceutical sectors, could offer a greater margin of safety in the short term.

Vipul Bhowar, Senior Director of Listed Investments at Waterfield Consultantbelieves that the rate cut offers growth opportunities in sectors such as banking, information technology, real estate and consumer goods in India, but also poses risks due to global economic uncertainties and potential volatility in foreign investment flows.

Apurva Sheth, Head of Market Perspectives and Research at SAMCO Securitiesrecommends investors to focus on defensive sectors such as FMCG and pharmaceuticals.

“Precious metals like gold and silver should also be included in the portfolio, at least until the market direction is clear,” said Sheth.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and brokerage firms, not of Mint. We advise investors to consult certified experts before making any investment decisions.