US Fed meeting: Will a 25 bps rate cut cheer the sombre Indian stock market?

US Fed meeting: As the US Federal Reserve prepares for its policy meeting this week, anticipations are high that the central bank will propose a 25 bps rate cut.

The rate reduction is anticipated to occur amid the backdrop of a presidential election year, adding a layer of complexity to the Fed's decision-making. The two-day Federal Open Market Committee (FOMC) meeting begins on Wednesday, with the rate announcement expected on Thursday.

The Fed’s decision carries added weight against a high-stakes presidential race, blending economic strategy with potential political repercussions.

While a rate cut typically infuses the market with optimism, this 25-basis-point cut may be a non-event, as it is already factored into market expectations.

"The latest GDP data is sufficient proof that the US economy is quite robust, and at the same time, the inflationary pressures are subdued, with the retail inflation numbers a stone's throw away from the target rate of 2 per cent. Against this background, the Fed will likely cut the Fed Funds Rate again, probably by 25 bps," said Joseph Thomas, the head of research at Emkay Wealth.

"While this cut may be small compared to the last one, it is likely to reaffirm the fact that even the small cut is a prelude to further rate cuts in future. That the sequential growth rate is not too impressive and that the level of unemployment has risen in the last few months would certainly trigger further rate cuts," said Thomas.

US Fed rate cut: Impact on Indian stock market

Most experts believe the Fed rate cut will not infuse positive sentiment, and investors would focus on Chair Jerome Powell's commentary on evolving growth and inflation dynamics.

Recent US GDP data signals that the world’s largest economy is standing strong, with inflation showing clear signs of easing. However, the Fed remains cautious, mindful of inflation risks amid unfolding geopolitical developments. Adding to the complexity, both US presidential candidates have pledged substantial capital expenditures, which could drive up the fiscal deficit.

While a 25 bps rate cut may not be a significant trigger for the market, a hawkish Fed may disappoint and deepen foreign capital outflow from the Indian market.

"A 25 basis point increase will be a non-event for the market, but overall commentary and outlook will be more important and eventful. If the Fed talks about keeping the rate unchanged for the next meeting, then it would have negative implications," said Shrikant Chouhan, the head of equity research at Kotak Securities.

Abhishek Jain, the head of research at Arihant Capital Markets also underscored that the market sentiment strongly favours a 25 bps cut, with Fed fund futures indicating a 99 per cent probability of this move.

Jain pointed out that inflation gradually aligns with the Fed's 2 per cent target, economic growth has remained resilient, and the labour market continues to show strength despite some signs of moderation. These positive indicators allow the Fed to proceed cautiously with rate adjustments.

"While another 25 bps cut might be on the horizon, market participants appear less focused on the rate cut itself and more attuned to the Fed's forward guidance and commentary. Investors will scrutinise Fed Chair Jerome Powell's remarks to gain insights into the Fed's future policy stance, particularly in light of geopolitical tensions, election-year dynamics, and global economic uncertainty. In this context, a 25 bps rate cut may indeed be a 'non-event' for the market, as it has already been largely priced in," Jain said.

"The real impact on market sentiment will likely depend on the Fed's outlook regarding economic conditions and any hints about the trajectory of future rate cuts. Investors will be looking for clarity on whether the Fed anticipates further easing or if it will adopt a 'wait and see' approach, especially as the US economy navigates a complex election year," said Jain.

According to Piyush Mehta, smallcase manager and CIO at Caprize Investment, with non-farm payrolls and job growth data for the past two months being lower than expected, the US Federal Reserve is expected to cut rates by 25bps.

Mehta believes this move is expected to be neutral and is largely built into expectations. The commentary on future growth and inflation targets will frame the overall outlook for an aggressive or normalising policy ahead.

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