The United States Federal Reserve on September 18 slashed key policy rates by a bigger-than-expected 50 basis points, marking its first cut in over four years. While the aggressive rate cut might give a short-term boost to Indian equities, experts have expressed concerns that markets could interpret the move as a sign of the Fed's heightened fears about a potential economic slowdown in the US.

Reacting to the Fed's decision, Gift Nifty futures on NSEIX surged nearly 120 points before partially paring gains. The US-listed American Depositary Receipts (ADRs) of Indian IT majors Infosys and Wipro followed a similar trajectory, gaining initially but later reversing course, trading down by as much as 1.8 percent from the previous close.

Indian share market to head up or down after Fed rate cut?

Nonetheless, the rate cut, along with a firm expectation of an easing interest rate cycle would provide a booster for Indian equities from sectors such as Banking and Finance to Information Technology, and even selective names in defensive ones such as FMCG and Pharma.

Nilesh Shah, MD, Kotak Mahindra AMC, said that this rate cut will facilitate flows to the emerging market assets with weaker dollar and lower rates. “From ‘inflation is transitory’ to ‘higher rates for longer’, the US Fed has come a long way to meet market expectations,” said Shah.

Ahead of the Fed announcement, analysts had predicted a 25 basis point rate cut but had acknowledged that a 50 bps cut could spark stronger market reactions. Kranthi Bathini, Director - Equity Strategy at WealthMills Securities, had noted that a larger cut would be a “booster” for emerging markets, particularly in regions with tighter banking system liquidity like India.

Emerging markets likely to salute Fed decision, see more foreign inflows

"While the market has already priced in a 25 bps cut, a 50 bps move could boost sentiment, especially in emerging markets," Bathini said to Moneycontrol before the rate cut announcement. He added that the market would closely watch Jerome Powell’s commentary for signals on future cuts.

He believes the Indian BFSI sector remains attractive, and any positive momentum in the US economy could be a tailwind for Indian IT stocks.

Bathini also expects the global shift in foreign investor focus from China to India, due to governance concerns in the former. Foreign institutional investors (FIIs) may show more interest in India, but may look for only stock-specific opportunities, as valuations remain stretched in the medium term, he said.

Ajit Mishra, Senior Vice President of Research at Religare Broking, expressed caution about the implications of an aggressive rate cut by the US Fed. “A 50-bps rate cut could signal an economic slowdown in the US, which may trigger a negative market reaction,” he said before the Fed announcement. Mishra added that recent FII activity had shown interest in Indian banking and NBFC stocks, driven by heavyweight names. However, he also warned that foreign investors have been seen preferring other markets over India.

Sectoral outlook: IT sector clear winner from Jerome Powell’s rate cut

Both analysts highlighted the importance of stock-specific strategies in the current environment, particularly in sectors such as IT, private banks, FMCG, pharma, and realty. Mishra cautioned against investing in public sector units (PSUs), citing high valuations despite recent corrections.

Bathini shared a similar view, saying that the foreign money is primarily targeting selective sectors. “The IT sector should be in a positive territory from here; any boost to the US companies from a rate cut will give a boost to Indian IT,” he said.

Note that the information technology stocks saw heavy selling in India on September 18 ahead of the Fed rate cut, with heavyweight stocks such as Tata Consultancy Services (TCS), Infosys, HCL Tech, Wipro and Tech Mahindra falling as much as 3.5 percent.

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