Why Nifty lost 600 points in 3 days ahead of US Fed decision, and how markets may move till next RBI MPC meet

A 25 basis points rate cut by the US Fed is already priced in and could lead to sideways consolidation in Indian equities markets with a positive bias.

India’s share market has fallen for three straight sessions with Nifty losing nearly 600 points since Monday, as cautious investors booked profits following a sharp rally ahead of the US Federal Reserve’s policy announcement due later today. The NSE index has dropped 2.5 percent from Friday’s close, after recording a sharp 6.1 percent rally from late November lows.

The recent market fall is due to profit booking after the NSE index’s sharp 6-7 percent recovery from its 21 November low, said Kunal Rambhia, fund manager and trading strategist at The Streets. Corrections, such as this one amounting to around 40 percent of the rally, are common before major announcements like the US Fed decision, he added.

Investors turning cautious after sharp rally, choosing to wait on sidelines

Profit booking and investor caution ahead of the Fed decision have also led to the recent decline, said Kranthi Bathini, director of equity strategy at WealthMills Securities. He said that 24,000 on Nifty is a critical level to watch, with an upside bias expected as long as this level is protected. Bathini suggested that short-term investors adopt a cautious approach with strict stop losses.

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On the other hand, more patient investors should use this phase to buy every dip in Indian equities, since the medium term outlook is positive for the markets within a range bound manner, said Bathini. Similarly, Rambhia said that the broader market trend remains positive, and dips could present buying opportunities over the next 15 to 20 days.

What happens to market if the US Fed doesn’t cut policy rate as expected

A 25 basis points rate cut by the US Fed, which follows earlier cuts of 50 basis points in September and 25 basis points in November, is widely expected, Rambhia said. He added that such a move is already priced in and could lead to sideways consolidation with a positive bias. However, if the Fed refrains from cutting rates, Indian markets could see further correction by 3-4 percent.

Bathini said the Fed’s commentary will be critical, particularly regarding the trajectory of rate cuts in 2025. A hawkish tone could trigger a knee-jerk reaction in the markets, he said, adding that the mid- to long-term impact of the US Fed on the Indian markets would be neutral.

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Next on market watch: New Governor’s first RBI policy - growth or inflation?

The Reserve Bank of India’s next Monetary Policy Committee (MPC) meeting, scheduled for 5-7 February, will be significant to watch under the new Governor Sanjay Malhotra, Rambhia said. He added that India might not match the pace of US rate cuts, which could result in underperformance in Indian markets in 2025. Bathini said a Fed rate cut could ease pressure on the RBI to maintain its neutral stance and possibly pave the way for policy easing in February.

Both experts suggested sector-specific investment strategies under current market conditions. Rambhia recommended focusing on stock- and sector-specific plays as the Union Budget approaches. For the short term, Bathini suggested investing in FMCG and pharma stocks, which he said are relatively stable, with the valuations turning reasonably attractive of late.

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