Fed rate cut fuel running out: What it means for Indian stocks and your investment strategy

In the stock market, things in the future are often more important than things that have been done. If this sounds confusing, consider the Fed’s Dec. 18 policy decision. However, major global markets fell. Why? Because investors are not reacting to the Fed’s actions, but to its future trajectory.

The Fed expects only two more quarter-percentage rate cuts by the end of 2025, while the market expects three to four cuts.

With its December rate cut, the Fed lowered interest rates by a full percentage point in 2024. Revised forecasts suggest this rate could fall to 3.75% to 4% by the end of 2025.

Stocks were disappointed with the Fed’s forecast. In the United States, the S&P 500 and Nasdaq fell 3%. India’s stock market benchmarks Sensex and Nifty 50 both fell 1%. European markets also reacted violently, with the CAC, DAX and FTSE indexes plunging 2%.

Fed revise rate cut forecast: What does this mean for Indian stocks?

Experts believe that the hawkish Federal Reserve will be detrimental to the Indian stock market, but it is not expected to cause major turmoil. Moreover, they remain positive about the Indian story.

“The Fed will reduce the number of rate cuts to two next year from the previously expected four due to low unemployment and high inflation, a hawkish stance that could unsettle investors. Foreign capital inflows as U.S. debt shrinks The possibility is worrying. appreciate.

“India’s growth story is a long-term story. The market will eventually take a breather, providing savvy investors with opportunities to buy quality companies on the downside,” Mullick said.

The Fed’s hawkish stance will push up the dollar and cause bond yields to rise, which will weigh on the Indian rupee and accelerate foreign capital outflows. The Indian currency is already at historic lows against the US dollar and is likely to depreciate further.

However, Anindya Banerjee, Head of Currencies and Commodities Kotak SecuritiesWe believe that USD/INR is expected to gradually rise to 87 over the next six to nine months as the Reserve Bank of India actively manages volatility through intervention measures.

Amit Goel, Co-Founder and Chief Global Strategist Pace 360While the development has brought a temporary setback to emerging markets, including Indian equities, the relative thinness of these markets ahead of the Fed meeting provides room for recovery.

“We expect Indian stocks to hit bottom soon and then rebound in the next four to five weeks as a return to the mean is imminent,” Goel said.

Has the Fed overestimated the risk of inflation?

The Fed is aware that Donald Trump’s tariff policies could lead to a spike in inflation. However, some experts believe the central bank has overestimated the risk of inflation.

Sujan Hajra, Chief Economist and Executive Director Anand Rati Group highlighted several mitigating factors that could limit inflationary pressures from Donald Trump’s tariff policies.

“First, the United States is one of the most closed economies in the world, with goods imports accounting for only 12% of GDP. Even if tariffs are fully passed on to consumer prices, the resulting inflationary impact is expected to be modest. “Hajira said.

“Secondly, a large portion of the tariff burden may be borne by exporters to the United States, who may reduce profits to remain competitive rather than passing the full cost on to American consumers,” Hajira said.

“Finally, Trump is expected to push for increased domestic hydrocarbon production, which could significantly lower fuel prices, offsetting inflationary pressures elsewhere in the economy,” Hajra said.

Due to these factors, Hajra believes that the Fed has overestimated the inflation outlook and also seriously underestimated the inflation outlook in 2022.

What should Indian investors do?

Experts believe that the Fed factors will not have a lasting impact on the Indian stock market and advise investors to choose high-quality stocks during the market decline.

“Given our view that inflationary pressures will remain subdued, we expect any negative market impact to be transitory. For Indian investors, any significant short-term correction should be viewed as an opportunity to accumulate equities rather than reduce allocations. That said, it’s important to recognize that the high average stock returns from 2020 are unlikely to continue in 2025.

Kotak Securities’ Banerjee said Indian investors should remain vigilant and strategically diversify their portfolios to cope with the changing macroeconomic environment.

Banerjee said fixed-income investors should expect upward pressure on Indian bond yields, making high-quality fixed-income instruments attractive.

Appreciate’s Moulik said large-cap stocks are often seen as safe bets during times of market uncertainty. However, since foreign institutional investors (FIIs) typically invest more in larger Indian companies, these stocks may not be fully immune to potential outflows.

“Investors may want to consider sector-specific strategies. Export-oriented industries such as information technology and pharmaceuticals may have an advantage. They can provide a greater margin of safety during this time,” Mullick said.

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Disclaimer: The above views and recommendations only represent the personal views of analysts, experts and brokers, and not those of Mint. Investors are advised to consult a certified expert before making any investment decisions.