The end of the elevated interest rate cycle is now in sight. Speaking at the Fed's annual economic conference in Jackson Hole, Wyoming, US Federal Reserve Chair Jerome Powell said the central bank was ready for a policy pivot.
“The time has come for policy to adjust," Powell said.
This cheered markets as the S&P 500 and Nasdaq rose over a per cent each. Indian stock market benchmark, the Nifty 50, jumped almost a per cent to reclaim the 25,000 mark, while the Sensex rose over 700 points to inch closer to the 82,000 mark on Monday, August 26.
The Fed last raised benchmark interest rates in July 2023 and has maintained the Federal Funds Rate at 5.25 per cent to 5.50 per cent since then to bring inflation down to its 2 per cent target.
While the inflation remains above 2 per cent, it has shown signs of significant easing. Slowing for a fourth consecutive month, the US CPI (Consumer Price Index)-based inflation came at 2.9 per cent in July, marking the slowest rise since March 2021.
Elevated rates for a longer period also slowed down the US jobs market. Data last week showed that US employers added fewer jobs than earlier estimated for the period from April 2023 to March 2024.
According to a Reuters report, "the US Labor Department's estimates for total payroll employment for the period were lowered by 8,18,000. This means that monthly job gains during the period averaged roughly 1,74,000, compared to the previously reported figure of 2,42,000."
The recent inflation data and a downward revision in job numbers signal that the long-anticipated rate cut is finally on the horizon, a move the market has been expecting since January. Earlier this year, some experts predicted 5-6 rate cuts in 2024. However, the Fed’s hawkish stance later raised doubts about whether even a single cut would materialise.
Now, expectations are high that the Fed will cut rates by 25 bps at each of its three policy meetings this year—in September (17-18), November (6-7), and December (17-18).
Although a 25 basis point rate cut by the US Fed in September seems highly likely, experts suggest it may not substantially boost the bulls, as it has largely been priced in.
"The September rate cut is already discounted in the market. When quantitative easing was withdrawn, the market went up because of expectations that the rates would cool down sooner or later. Interest rates moved to 5.25-5.50 per cent, but the markets moved up only because it was expecting the rates to peak out," G. Chokkalingam, the founder and head of research at Equinomics Research Private Ltd, observed.
"In the same way, the market is fully convinced that a rate cut will happen. So, the market may move up for other reasons and not because of rate cuts," Chokkalingam said.
Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers, shares this view.
"The likelihood of a 25 basis points (bps) rate cut by the US Federal Reserve in September 2024 is almost certain, with a smaller chance of a 50-bps cut. The 25-bps cut is mostly priced into the market, so its impact on global markets, including India, may be modest," said Hajra.
"A 50-bps cut could spark a significant initial rally in Indian equities, seen as growth stocks. However, deeper cuts might signal the Fed's concern about US growth, leading to market volatility. If the rupee doesn't appreciate, export-oriented sectors like IT and pharma in India could benefit," said Hajra.
Nishit Master, Portfolio Manager at Axis Securities, believes that this rate cut alone will not cause significant movement in the market.
Master said further market movements could be influenced by any signals from the US Fed on the quantum and pace of rate cuts in the future beyond the rate cut expected in September, along with the easing of geopolitical tensions in the Middle East and Russia / Ukraine.
However, lower rates would mean a greater inflow of foreign capital into emerging markets like India. So, more than the September rate cut, the broader trajectory of rate cuts throughout the cycle will have a more meaningful impact on the Indian stock market.
"More FII money can come to emerging markets if rate cuts continue for 100-200 bps. The market has still not discounted how soon a 200 bps rate reduction will happen. If we see an overall 200 bps rate reduction within one year, then emerging markets, including India, can go up substantially," Chokkalingam underscored.
According to Master of Axis Securities, sectors that may benefit from rate cuts include NBFCs, auto, auto ancillaries, industrials, and new economy companies, including new tech companies.
According to Chokkalingam, apart from Nifty 50 stocks, FMCG and telecom sectors may gain due to rate cuts. However, he thinks the IT sector may be a laggard as there is no hope of double-digit growth in the short to medium term. Regarding rate-sensitive sectors, Chokkalingam underscored that the automobile sector has played out, and there is a slowdown in sales. Realty, too, has played out, and the banking sector is now experiencing four to five headwinds.
"Liquidity ratio, credit-deposit ratio, provisions, moderating overall lending growth... there are a series of headwinds for the banking sector," Chokkalingam said.
On the other hand, Kunal Mehta, Associate Director at Equirus, sees the IT sector may do well as rate cuts should trigger incremental discretionary spending by US corporates. Also, the dollar index has weakened to 101, which bodes well for commodities and can boost metal shares in the short run.
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