Moneycontrol Pro Panorama | Another Fed rate cut, what’s the outlook for Indian equities?

The US Federal Reserve lowered interest rates on expected lines

Yes, the US Federal Reserve lowered interest rates on expected lines -- 25bps -- to 3.5-3.75 percent, marking a cumulative 75 bps cut in 2025 and 175 bps cut since September 2024. But the dissent in the Federal Open Market Committee (FOMC) leaves an air of uncertainty on the rate cuts that could unfold in 2026.

The median projections indicate one rate cut in 2026 and another in 2027. But strangely, the markets are pricing in two, if not three, rate cuts in 2026. The current official data on US inflation that continues to be elevated and strong economic growth prospects as indicated by an upward revision on gross domestic product (GDP) growth for 2025 and also 2026 negate any compelling need for rate cuts.

However, the caveat here is the limited availability of high-frequency macroeconomic data due to the US government’s 43-day shutdown. The brief rise in US and global markets following the December rate cut perhaps alludes to the fact that investors are willing to wait for better clarity in the Fed’s January meet on trade, inflation, consumption and the labour market. Not to mention the uncertainty around the appointment of the new Fed chair (May 2026) and any impact that would have on the bank's future course.

At the time of writing this note, Indian equities were in the green. However, investors would now focus on the India-US trade deal that continues to be “in the works”, but there are ample signals which suggest that the trade deal is round the corner. For instance, Putin’s visit to India threw no negative surprises that could derail India-US negotiations. India’s import of Russian oil too, is reportedly lower. Today’s media reports, where India’s Chief Economic Advisor V Anantha Nageswaran has explicitly said he would be surprised if the deal is not through by March 2026, are sentiment boosters for Indian equities.

Importantly, brokerage consensus following the September quarter results point to improved earnings growth in FY2027. That the broader markets barely moved in the last one year has also led to sobering valuations. Hence, as corporate earnings grow, it would strengthen the case for FII flows to India.

Historically, interest rate cuts in developed economies, mainly the US, give more leeway for India’s central bank to cut rates that augurs well for India’s consumption story that displayed some slack in recent months.

As Indian investors step into 2026, the spotlight would be on the India-US trade deal and the US Fed's stance on rates for the year.

What else are we reading?

How China racked up a $1tn trade surplus (republished from the FT)

Technical Picks: RBLBANK, BLUESTARCO, TATASTEEL, ICICIPRULI