How will the Indian stock markets behave when the US Federal Reserve slashes bank interest rates on Wednesday? Stock market analysts believe it may boost the Indian bourses initially, but it will depend largely on how much of a rate cut is announced. Experts believe the Federal Open Market Committee or the FOMC, as it is generally called, is likely to announce a cut of 25 basis points to be most modest. But many people who keep an eye on the markets believe Fed Chair Jerome Powell may declare a cut of 50 basis points.
Is 150-Point Cut Possible?
Experts believe the Federal Reserve is likely to cut the interest rates by 150 basis points in one and a half years to come. As the inflation rate has come down and both of the presidential election candidates have expressed willingness to continue with the present economic policies, Powell may keep himself to the limit of 25 basis points.
Why Is Indian Stock Market Cautious?
Indian stock markets are extremely cautious of the Fed rate cuts, these were in red when the markets opened. The stock markets came down a little bit below the earlier levels at 9.33 AM (the market opened at 9 AM) with BSE Sensex slipping 39 points to 83,040.87 points and the Nifty 50 by 15 points to 25,403.25 points. This was despite a good buying in the large-cap shares. The experts believe it shows the market players are cautious and they have adopted the policy of wait and watch before the formal announcement by the Federal Reserve.
FII, DII Net Buyers
The Foreign Portfolio Investors (FPIs) were the net buyers with a purchase of Rs. 420 crore while the Domestic Institutional Investors (DII) purchased stocks worth Rs. 874 crore. The net long position of Foreign Institutional Investors (FIIs) came down from Rs. 2.2 lakh crore to Rs. 2.13 lakh crore on Tuesday.
Why Are US Stock Markets Bullish
On the contrary, the US stock markets were bullish on Tuesday with S&P 500 Index soaring to 5,670.81 points. The Dow Jones Industrial Average also went up. On the other hand Nikkei of Japan, Hang Seng Future remained flat on Wednesday morning.
Why Are Indian Bourses Concerned?
The Indian bourses are concerned with the fact that the trade deficit widened to a 10-month high of $29.7 billion in August after the imports hit a record high of $64.4 billion, while exports came down for the second month in a row to $34.7 billion.
On the other hand, in a positive development, the Wholesale Price Index (WPI)-based inflation came down to a four-month low to 1.31% on an annual basis in August from 2.04% in July.
What Will Happen If Fed Cuts Rates By 25 Basis Points?
Stock market analysts believe a 25-basis point reduction in the interest rates by the Federal Reserve will not have much impact on the Indian stock markets, which are already trading at or near historically high levels.
Will 50-Basis Point Cut Jolt Indian Stock Markets
On the other hand, if the Fed slashes the interest rates by 50 basis points, the Indian bourses may get a jolt. But this impact too may be temporary and may not last long. However, market experts believe if the Fed continues with slashing its rates in next quarterly meetings, the Indian stock markets may go up considerably in the last quarter of the current financial year.
The economists point out that the stock markets generally perform best when the interest rates are stable or come down gradually. It may also be noted that when the GDP growth rate begins to decline sharply, it prompts sharp rate cuts to support the economy. But it may not be a positive signal for the stock markets. The assumption that lower interest rates automatically result in better outcomes in the stock markets may not prove right at all times.