No material change in market outlook post Fed rate cut; all eyes on RBI now: MC Poll

Chair Jerome Powell

The US Federal Reserve's 50-basis-point rate cut, while broadly positive for global stocks, is in line with market expectations and is unlikely to boost the near-term equity outlook significantly, experts said.

With the Fed's move out of the way, analysts said the focus now shifts to the Reserve Bank of India (RBI), and a rate cut by the Indian central bank would improve investor sentiments and flows -- both domestic and foreign institutional.

Moneycontrol reached out to more than a dozen market experts across categories including, research analysts and fund managers. The unanimous view was that the US Fed rate cut was on expected lines – hence the subdued reaction on Thursday – and the focus will now shift to RBI as the Monetary Policy Committee is scheduled to meet next month.

Incidentally, a MC Poll of 18 economists on Thursday showed that just three predicted the possibility of a 25-basis-point rate cut by RBI in October.

“The focus is more on the RBI's reaction, which is expected to be delayed and not immediate. The market will be watching for RBI’s announcements and outlook rather than the Fed's actions,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

“There is a likelihood of a change in stance from the RBI, and a rate cut may happen in the next meeting. Overall, there is no significant change expected, and the market is waiting to see what the RBI will do next to assess the potential impact,” added Jasani.

In a similar context, Emkay Global said that it expects the RBI to follow the US Fed and cut rates either in October or December.

“Our view is that the impact of the rate cuts on the broader markets… is likely to be limited. Select sectors may do well, but only if there is a second-order impact on earnings,” it said.

This assumes significance as while the US Fed decision was keenly awaited the ‘buy on rumour, sell on news’ approach of the broader market ensured that there was no exuberance visible in the Indian markets on Thursday.

The benchmark Sensex gained a mere 236 points on Thursday to close at an all-time high of 83,184.80 while the broader Nifty ended the day at 25,415.80, up 38.25 points.

“In terms of market reaction, the immediate response may appear as a ‘knee-jerk’ reaction, common with the 'buy the rumour, sell the news' dynamic. However, on a broader scale, this is a favourable development for emerging markets, including India. Key sectors like financials, pharma, and IT, which are closely tied to global trends, are well-positioned to benefit from renewed demand,” said Krishna Appala, Senior Research Analyst, Capitalmind Research.

Similarly, Deepak Ramaraju, Senior Fund Manager, Shriram AMC, is of the view that the markets are expected to remain range-bound but with a positive bias as central banks of broader emerging economies are likely to undertake rate cut decisions.

“On the domestic front, RBI will focus on the data and might likely undertake a rate cut in December… The FII flows can be outbound in the short term and as the US dollar starts easing, the flows can come back into India,’ said Ramaraju.

Foreign portfolio investors (FPIs) have been buying aggressively buying shares in the Indian stock market in the recent past with the September net buying pegged at nearly $4 billion – a huge jump from previous month’s $873 million.

“In terms of FII inflows, while there's a lot of talk about how this could benefit India, it's not guaranteed. Yes, the Fed rate cut is positive for capital flows, but there are other factors to consider -- US elections, earnings, oil prices, and more,” said Trideep Bhattacharya, CIO, Edelweiss Asset Management.

“In terms of capital flows, falling interest rates generally boost capital inflows into emerging markets. The second-order impact is that sectors benefiting from rate cuts, as we transition from rising to falling rates, will likely see positive effects. For Indian markets, sectors such as non-banking financial companies (NBFCs), real estate, and IT services are expected to benefit from this environment,” he added.

“The (US Fed) rate cut was largely in line with expectations… Our outlook on the equity side remains bullish… As for the RBI, we are watching to see if they will follow suit. The RBI has expressed its intent to follow domestic cues, but given the state of domestic macroeconomics, including persistent inflation concerns, the RBI may not act in perfect alignment with recent events,” said Nirav Karkera, Head of Research at Fisdom.

“There could first be a change in stance, with a potential rate cut happening in the next monetary policy announcement. However, we do not expect the RBI to make an immediate move or match the recent rate cut in size," added Karkera.

On a different note, a section of market experts are also advising investors to remain cautious as valuations currently seem to be in the higher range and not exactly in sync with earnings and fundamentals.

“We have been maintaining our view for last couple of months that Fed would be cutting rates soon and that has now come upon. However, the intensity of rate cuts seems steep and could be more political agenda driven for the US. We maintain our cautious optimism view on Indian markets and are focusing on bottom-up stock ideas where valuations and earnings are in sync,” said Aniruddha Sarkar - Chief Investment Officer & Portfolio Manager - Quest Investment Advisors.