How US Fed's rate cut will impact Indian stock markets
What's the story
The US Federal Reserve is likely to announce a 25 basis points (bps) rate cut during its two-day policy meeting starting today. The move comes amid persistent inflation and lackluster job growth data. Some experts even predict a more aggressive 50bps cut could be on the table. However, concerns over rising inflation due to President Donald Trump's tariff policies may limit the extent of any major reduction.
Policy signals
Powell hinted at 'policy adjustments' in late August
In his speech on August 22, Fed Chair Jerome Powell hinted at possible "policy adjustments" in the coming months. Powell emphasized that inflation risks remain tilted to the upside, while employment risks lean to the downside. This dynamic has shifted the overall risk balance, potentially warranting an adjustment in the central bank's policy stance. Following his comments, global markets have started anticipating in a 25bps rate cut.
Job market
Job growth plummeted in August
The latest data from the US job market suggests that it's high time for the Fed to take action. The economy created 911,000 fewer jobs in the year through March than previously thought, and unemployment rose to 4.3% last month from July's 4.2%. In August alone, job growth plummeted to just 22,000—down sharply from July's figure of 79,000.
Inflation fears
Consumer inflation hit highest level this year in August
Despite the weak job market, a major rate cut is unlikely as the battle against inflation continues. US consumer inflation hit its highest level this year in August, with the Consumer Price Index (CPI) rising to 2.9% from 2.7% in July. The Fed's preferred inflation measure, Personal Consumption Expenditures (PCE), remained steady at 2.6% in July. However, fears of further inflation spikes due to Trump's ongoing tariff war remain strong.
Market response
Impact on Indian stock market depends on Powell's tone
The impact of the US Fed's rate cut on the Indian stock market will depend on Powell's tone and assessment of US growth and inflation. A dovish Powell could boost market sentiment and strengthen expectations for a major rate reduction. "A 25bps rate cut won't boost the Indian stock market as it is largely discounted. A cumulative 50bps or even bigger cut will be a positive for the Indian market," said G. Chokkalingam, founder of Equinomics Research.
Investor interest
Fed's dovish stance could reverse FIIs selling trend
The Fed's rate cuts and dovish stance could reverse the current trend of foreign institutional investors (FIIs) selling Indian equities in the cash segment since July. With valuations looking reasonable and expectations of an earnings revival bolstered by recent GST reforms, benign inflation, and a healthy monsoon, the Fed's policy easing could be another trigger for renewed FII inflows into Indian markets.