After the recent rate cut by the US Federal Reserve, the US stock markets witnessed a dip, raising questions about how it will influence global markets, including India. The US Fed announced a 0.50% cut in interest rates, the first cut in four years, aimed at boosting the economy ahead of the upcoming US presidential election. While the US markets reacted with some initial gains, they later closed in red, with the Dow Jones, S&P 500, and Nasdaq all posting slight declines.
How the Fed’s Rate Cut Impacts the Global Economy
The Federal Reserve’s decision to cut interest rates is significant, especially as it comes after a prolonged period of stable rates. This move is expected to make loans cheaper in the US, encouraging borrowing and stimulating economic activity. With inflation moving closer to the Fed’s 2% target, the rate cut is seen as an attempt to strengthen the labor market, which has shown signs of slowing down. Experts also predict that another 0.50% rate cut could follow later this year to support economic growth further.
However, despite this rate cut, there are no immediate signs of a recession, according to the Fed. By lowering interest rates, the Federal Reserve is focusing on reducing unemployment and stabilizing inflation, which is expected to hit the 4.4% mark soon.
US Markets Close in Red
On Wednesday, the US markets ended the day with minor losses despite initial gains following the Fed’s announcement. The Dow Jones Industrial Average dipped by 103.08 points (0.25%), closing at 41,503.10. The S&P 500 saw a decline of 16.32 points (0.29%), ending at 5,618.26. Similarly, the Nasdaq Composite dropped by 54.76 points (0.31%), closing at 17,573.30. Investors are now watching for further movements, with the possibility of another 0.25% rate cut at the Fed’s upcoming November meeting, which currently has a 35% likelihood.
Will the Indian Stock Market Be Affected?
While the US markets closed in red, the Indian stock market has shown resilience to global economic factors, including the Fed’s interest rate cuts. Historically, Indian markets have often rebounded quickly, even after negative news from the US. A recent study by CapitalMind Financial Services found that the Indian stock market has consistently outperformed or kept pace with the S&P 500 over the last 20 years, despite changes in US monetary policy.
While a rate hike by the Fed usually has a more significant impact, rate cuts tend to create less volatility for Indian equities. The Indian markets may experience minor fluctuations in the short term, but they are likely to stabilize or even gain momentum in the coming days.
Historical Impact of Fed Rate Cycles on Indian Markets
Looking at past trends, Indian markets have responded differently to various Fed rate cut and hike cycles. The period between July 1990 and February 1994, when the Fed was in a rate-cutting phase, saw the Nifty gaining an impressive 310%. Similarly, during the rate hike cycle from June 2004 to September 2007, Nifty gained 202%, reflecting the strength of the Indian economy even during periods of tighter monetary policy in the US.
On the other hand, there have been instances where Nifty posted negative returns during rate hike cycles. For example, between February 1994 and July 1995, Nifty fell by 23%, and during the rate hike from March 1997 to September 1998, it dropped by 14%.
What’s Next for Indian Investors?
With the US Fed now cutting rates, it presents a mixed picture for Indian investors. The rate cut is expected to lead to a temporary spike in volatility across global markets, including India. However, Indian markets have shown a strong ability to absorb external shocks and bounce back. Investors in India should keep an eye on global cues but remain optimistic, as the long-term outlook for Indian equities remains positive.
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