The Indian equity benchmark indices hit record-high levels after a strong rebound due to anticipation of dovish stance by the US central bank. The hawkish stance which started in March 2022 to combat inflation after the pandemic is expecting its trend reversal in the September monetary policy meeting.
The Federal Reserve last raised interest rates in July 2023 and has since maintained the Fed Funds Rate at 5.25 to 5.50 per cent to constrain the inflation below 2 per cent. Despite the inflation being more than 2 per cent, there are clear indications of significant respite.
For the fourth month in a row, the US CPI inflation rate slowed down, coming in at 2.9 per cent in July, which is the slowest increase since March 2021. At the Federal Reserve's annual economic conference, Chair Jerome Powell indicated that the central bank is prepared to shift its policy approach. This boosted market sentiment, leading the Nifty 50 to regain the 25,000 level on 26 August as markets are pricing in the expected rate cuts.
However, with this global cue ahead, the market stakeholders need to identify and design their investing strategy. The risk-reward ratio along with impact of foreseen global events are essential to craft trading strategies and portfolio rebalancing.
“Buoyed by the recent unemployment and other supportive data trends, consensus is indicating a 25 basis point (BPS) rate cut. We believe the recent rally across the global markets has already factored in the expectations. We acknowledge that there is an upside risk if the rate cut exceeds 25 bps or the future roadmap is more aggressive than the anticipation,” said Anand Jain, Director, Buy-side Investment Research, Acuity Knowledge Partners.
With the dull expectation from anticipated rate cut, Arindam Ghosh, Co-founder, Alphaniti Investment Advisors said, “The Indian market is also being driven by domestic liquidity and not solely by foreign inflows. Thus, the September rate cut is unlikely to cause a significant rally unless there are surprises, such as a larger-than-expected cut of 50 basis points as they are already behind the curve, which could initially trigger a positive response.”
Inevitable Growth
There are certain sectors which are poised to benefit from the US rate cut. Given the strong opportunity going ahead, the IT sector witnessed a strong rally over the last month. The NiftyIT Index gained 4.5 per cent over the last month as compared to Nifty 50 Index up by 2.1 per cent during the same period.
While a rally is possible, the extent may be moderated by current valuations and global growth concerns. Overall, while the IT sector has a positive outlook, a strong rally would depend on both macroeconomic improvements and company-specific performances
“IT companies in Q1 have demonstrated better performance, reflecting a shift in demand and a stabilisation of uncertainties in key global economies. The Indian IT services sector is seeing a quicker rebound in emerging technologies. However, discretionary spending continues to be weak due to persistent macroeconomic worries,” said Anil Rego, Founder and Fund Manager, Right Horizons PMS.
Despite ongoing uncertainties, the sector has shown resilience in securing deals. Demand for emerging technologies remains strong, with numerous companies achieving record-high deal closures. “We believe the sector will likely witness a rapid recovery as macroeconomic conditions improve,” Rego added.
Will RBI Follow?
In its recently concluded monetary policy meeting, the Reserve Bank of India (RBI) kept the repo rate steady at 6.5 per cent, leaving it unchanged for the ninth consecutive time. While the inflation is under control, the dovish stance by world banks could trigger a rate cut by the domestic central bank.
“There is an expectation that the RBI may adopt a dovish stance following the Fed. However, any rate cut by the RBI in such a scenario would likely be gradual and might occur around December. This approach would align with the global monetary trend and is expected to support growth and maintain market stability,” said Ravi Singh, Senior Vice President, Retail Research, Religare Broking.
There is a good possibility that the RBI might adopt a more dovish stance following the Federal Reserve’s expected rate cut. However, for now RBI is likely to be cautious as domestic food prices remain volatile, with CPI through Q1 FY 26 expected to be slightly higher than its 4 per cent benchmark. “RBI is expected to act only following a couple of cuts or a more pronounced cut by the Fed, and if global economic conditions, including inflation and growth, align favourably,” said Jain.
Sectors To Avoid Bets On
The experts believed that there are certain sectors in the Indian equity market where the rate cut push will not generate any substantial momentum. The chemical space due to mixed financial numbers, Telecoms due to competitive pressures, high capital expenditure requirements and regulatory uncertainties are advised to avoid.
Experts also say that the Oil and Gas sector can be negatively impacted by fluctuating crude prices and global demand uncertainties, which are influenced by broader economic conditions rather than just interest rates.
Investors should remain optimistic, focusing on strategies that align with prevailing market trends. It is advisable to exit fundamentally weak stocks and hold on to those with strong financials. This approach will better equip investors to navigate market challenges and achieve good returns in the long run, advised Singh.
