The US Federal Reserve had reduced its benchmark interest rate by 50 basis points for the first time since 2020 as the central bank began to reverse the tight policies it had implemented in response to inflation.
The benchmark policy rate of the Federal Reserve has stood in the 5.25%-5.50% range for 14 months. That is the longest period since three of the previous six periods during which the Fed kept rates steady, but less than the 15-month pause before the 2007-2009 financial crisis and well below the 18-month hold during the "Great Moderation" of the late 1990s.
Indian investors will be awaiting that decision because that is expected to change the market trend on Thursday, September 19. 50 bps cut can fuel the market sentiment, as experts believe.
How Indian market has reacted to Fed rate change in the past?
A recent report of Capitalmind Financial Services throws light on the fortitude of Indian markets through the past two decades without taking into consideration the stance of Federal Reserve's monetary policy. A Fed rate hike historically usually makes for a poor day for the equity markets, but the next day is usually rebounded. The report says that over the last 20 years, in local currency terms, Nifty has either outperformed or, at least, kept pace with S&P 500.
The US Federal Reserve has seen six alternating cycles of easing and tightening in the last 34 years. The entire Fed easing cycle that existed between July 1990 and February 1994 stands out as the most supportive for Indian markets. In this period, Nifty went up by a whopping 310 per cent. The period of tightness between June 2004 and September 2007 was also good as the rise was of 202 per cent. The Nifty, however, lost 23% during two cycles of curtailment: from February 1994 to July 1995, and March 1997 to September 1998, a fall by 14%.
"With global inflation and growth trends showing signs of moderation, we may be nearing the end of this cycle of elevated interest rates. Historically, US rate cut cycles have led to negative equity returns in the US, with Indian markets (Nifty 50 TRI) also seeing similar results in 2 of the last 3 instances," said Vaibhav Porwal, Co-founder, Dezerv.
Benchmark indices Sensex and Nifty saw volatile action on Wednesday as Asian peers would have been, waiting for the FOMC meet around the globe to say what's on the cards.
Nifty consolidated after making a fresh high and closed with a loss of 41 points at 25378 levels. Broader market witnessed profit booking for the second consecutive day with the Nifty midcap 100 and Nifty smallcap 100 down -0.6%/-0.4% respectively. Barring Banks and Financials, all sectors ended in red. Siddhartha Khemka, Head - Research, Wealth Management, Motilal Oswal Financial Services Ltd.
"A 50bps rate cut by the Fed could bring some cheer to market sentiments. Hence, we expect the market to remain volatile in the near term with rate-sensitive sectors in focus," said Khemka.
Meanwhile, though options data analysis reflects that this consolidation might go on as there is a high open interest of about 47 lakh shares on the call strike of 25,500. On the other hand, the open interest at the put strike of 25,400 is also much huge - around 45 lakh shares.
Looking forward to tomorrow, we expect rather fast and volatile market movements dependent on the result of the Federal Reserve meeting. Thus, it would be wise to stay away from overnight positions, said Shrey Jain Founder and CEO SAS Online.
