The US Federal Reserve's recent decision to cut interest rates by 25 basis points (bps) has sent ripples through global markets, and the Indian stock market is no exception. This move, driven by concerns over slowing economic growth and moderating job gains in the US, marks the first rate cut in 2025 and signals a potential easing cycle ahead. While the immediate impact on Indian equities may seem limited, experts suggest that further easing could enhance risk appetite and trigger positive reactions in specific sectors.

Impact on Indian Stock Market

• Positive Sentiment: The rate cut is generally perceived as a net positive for the Indian stock markets. Lower US yields reduce the attractiveness of American bonds, encouraging foreign investors to allocate more funds to emerging markets like India. A weaker dollar can also aid in rupee stability, which helps curb import inflation and supports investor sentiment.
• Increased Capital Inflow: A US Fed rate cut typically leads to lower interest rates in the US, making returns on US assets less attractive to global investors. Consequently, foreign investors, particularly institutional investors, may seek higher returns in emerging markets like India, leading to increased foreign capital inflows into Indian equities, potentially pushing stock prices higher.
• Rupee Appreciation: The rate cut often results in a weakening of the US dollar as investors move capital to higher-yielding economies like India. This can cause the Indian Rupee to appreciate against the US dollar, making imports cheaper and helping to reduce imported inflation in India.
• Bond Yields and FII Flows: Bond yields have already shown a downward trend. A dovish tone from the Fed, coupled with expectations of more than two rate cuts in the coming months, could weaken the US dollar, lower global yields, and potentially strengthen the Indian rupee. This scenario could reverse the significant Foreign Institutional Investor (FII) outflows observed in the recent past, boosting the Indian stock markets.
• ** आरबीआई Flexibility:** The Reserve Bank of India (RBI) might respond to the Fed's rate cut by easing its monetary policy, which could lead to lower domestic interest rates. This gives the RBI greater flexibility to continue with an easy monetary policy and even open up room for additional rate cuts.

Limited Immediate Impact?

While the overall sentiment is positive, some experts believe that a 25 bps rate cut is already partially factored into domestic markets. Recent experience also suggests that US Fed rate actions have a temporary and limited impact on the Indian stock market. The medium- to long-term market trend will likely be dictated by GDP growth and corporate earnings.

Stocks Likely to React

The rate cut may not have a uniform impact across all sectors. Sentimentally, rate cuts may augur well for domestic IT and metal companies in the short term. Stocks from the IT and banking sectors may react to the Fed's policy decision. Sectors with overseas borrowings might benefit in the short run. Furthermore, with interest rate cuts, affordable housing stocks are expected to perform well.

Overall

The US Fed's rate cut provides increased flexibility to the RBI, allowing it to maintain an accommodative stance for longer. For investors, this environment remains supportive of accrual-oriented fixed income strategies. The Indian market is potentially poised, with valuations appearing reasonable and expectations of an earnings revival strengthened by recent reforms, benign inflation, and a healthy monsoon. The Fed's policy easing may emerge as an additional catalyst for renewed FII inflows into Indian markets.