US Fed rate cut: Should we expect strong FPI inflows? How it may impact the Indian stock market?

The long-anticipated rate cut cycle has finally arrived. Speaking at the Jackson Hole symposium last Friday, US Federal Reserve Chair Jerome Powell announced that it’s time to shift gears on monetary policy. This rate cut is a key catalyst for the Indian stock market, as it could drive down US bond yields and the US dollar, potentially triggering a strong inflow of foreign capital into emerging markets like India.

Foreign investors have been selling Indian equities in August so far, while domestic institutional inventors (DIIs) have been relentlessly buying.

Data show that foreign portfolio investors (FPIs) have taken away ₹30,102 crore in the cash segment in August till 26th. On the other hand, DIIs have bought equities worth ₹48,950 crore.

With the Indian stock market already at record highs, bolstered by strong domestic investor support, the key question is whether rate cuts could prompt FPIs to aggressively buy Indian equities, potentially pushing the Nifty 50 to new all-time highs.

Should we expect strong FPI inflows?

The recent selloff of Indian stocks by FPIs can be attributed to uncertainty surrounding the interest rate outlook and the stretched valuations of Indian equities. As the Fed is almost certain to cut rates now, hopes are high that Indian equities could return to FPI focus.

Besides, foreign investors remain upbeat about the Indian economy, as reflected by their infusion of more than ₹1 lakh crore in the Indian debt market this year.

According to NSDL, FPIs have pumped in ₹1,03,871 crore in the Indian debt market till 26 August this year. In August so far, FPIs invested ₹12,883 crore.

Experts point out the anticipation of a US Federal Reserve rate cut in September has heightened investor interest in emerging markets, including India. Historically, lower US interest rates have made emerging markets more attractive by reducing the returns on US bonds, prompting investors to seek higher yields elsewhere.

"India, with its strong GDP growth, stable political environment, and robust domestic consumption, stands out as a prime destination for these flows​," Arindam Ghosh, co-founder of Alphaniti Investment Advisors, observed.

According to Ravi Singh, SVP - Retail Research at Religare Broking, while the possibility of a US Fed rate cut is widely built into markets, to a fair extent, it may already be discounted by the markets. However, actual implementation could still impact FPI flows to India.

"A rate cut by the Federal Reserve will weaken the US dollar, thus increasing the relative potential of emerging markets, like India, offering better returns to foreign investors. Lower US interest rates also reduce the relative attractiveness of US assets, with growth markets such as India coming to the forefront," said Singh.

"Though some of this is already priced in, the magnitude of FPI inflow could rise if the Fed signals a more accommodative stance ahead. In fact, it may even be stronger, feeding into better market sentiment and higher liquidity," Singh added.

How may it imapct the Indian stock market?

The Indian equity market's ability to withstand global volatility, supported by favourable domestic factors such as a good monsoon season, declining crude oil prices, and a strong banking sector, position it as an attractive destination for continued FPI inflows.

Anil Rego, the founder and fund manager at Right Horizons, underscored that India's strong economic standing is expected to draw greater interest from investors in case of a rate cut.

"A rate cut in September could direct more investments into emerging markets, with India likely to gain significantly since the growth of the domestic economy is structurally driven by sustained domestic consumption, increased infrastructure spending and supportive government policies," said Rego.

Aamar Deo Singh, Senior Vice President of Research at Angel One, pointed out that the probable September rate cut by the US Federal Reserve would bode well for the Indian markets. There could be an increase in flows from FPIs, which are always on the lookout for investment opportunities.

"Many of the FPIs find India to be an attractive investment destination. The rate cut would likely force FPIs to scout for more investment avenues, and Indian companies would stand to gain from the same. With Indian markets trading at record highs and the growth trajectory remaining firm in coming years, cutting across sectors will likely make India a more favoured investment option in coming quarters," said Singh.

According to Ghosh of Alphaniti Investment Advisors, large-cap stocks, which have remained relatively undervalued, are particularly attractive to FPIs.

"With large caps being fairly valued and the overall market showing signs of stability, the Indian market is poised to benefit significantly from global liquidity shifts triggered by the anticipated Fed rate cut," Ghosh said.

"FPIs have been particularly active in sectors like financial services, capital goods, and FMCG, which are expected to benefit from increased consumer spending and capital investments. Indian sectors that might benefit from a Fed rate cut are IT, BFSI, auto, and realty. Metal stocks may also perform well due to declining dollar indexes and US bond yields," said Ghosh.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.