FOMC continues its rate cut path with 25 bps rate cut in Nov meeting: How will it bode for D-Street?

The US Federal Reserve for the second conseutive time has slashed interest rate on Thursday but at a relatively lesser aggressive pace than earlier. I a follow-up to the previous half percentage point rate cut in September, the Federal Open Market Committee (FOMC) reduced its overnight borrowing cost by a quarter per cent or 25 basis points to 4.5-4.75 per cent.

Though this poilcy rate cut has a bearing on the rate which bank charge each other in case of overnight lending, it may also impact other debt instruments such as credit cards and other consumer loans among others.

The move was largely in-line with market expectations as it has been indicated by policymakers since the last Fed meet in September. According to reports, the decision was unanimous, and unlike the past where the Fed governnor gave the first 'no' vote. But this times, the Fed Goveror gave his consent for the rate cut.

Post-meeting statement, however, underlined how Fed loooks at the US economy and among them there was a changed view on how it evaluates the work done in order to tame inflation while at the time supporting the labour market.

“The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance,” the document said, a change from September when it noted “greater confidence” in the process.

The follow-up rate cut has been largely to address inflationary pressure in the US markets.

How D-Street reacts to Fed's second consecutive rate cut?

Even as the rate cut will boost the inflows into the emerging markets including India, elevated valuations have been a lingering concern resulting in a stupendous FII outflow since October.

Now despite the Nasdaq and S&P 500 closing at record highs, Indian equities continued to trade lower with Nifty holding its ground just above 24,150 levels.

Apurva Sheth, Head of Market Perspectives and Research , SAMCO Securities remarked that US Fed Walks as it wasn't a surprise when the US Fed cut interest rates by 25 basis points (bps) to 4.75 per cent.

He added that the Fed had given enough clues and the market too had anticipated these rate cuts. However, what was surprising was how the US 10 year bond yields moved over the last one and half month which has been rising relentlessly from 3.6 per cent to almost 4.5 per cent despite the 50 bps cut in the last Fed meeting.

It seems that the market is anticipating slower rate cuts going ahead and there can even be chances of inflation rising. Although the Fed Chief is hopeful of taming inflation back to the 2 per cent target soon, thus not warranting a restrictive policy. The bond yields have cooled off and slipped below the 4.335 per cent mark. This should be bullish for emerging markets like India, he noted.

Akshay Chinchalkar, Head of Research, Axis Securities held that while the market anticipates further cuts in the future, expectations for aggressive easing have been pared back. It is particularly true now that Trump has won a second term. Still, Chair Powell is committed to additional cuts but not to timelines. This indicates that a pause in December is also a possibility, particularly given the strong economic growth, added Chinchalkar.

In terms of local equities, a wave of foreign selling and underwhelming second-quarter earnings have led to an 8 per cent decline in the Nifty index. However, the medium-term trend remains stable, with the level of 23,800 acting as support on the downside. The street view suggests that the story for Indian stocks is likely to be driven by domestic consumption and investment trends. Still, a rotation into Chinese equities, a stronger dollar, and potential tariffs from Trump’s administration are likely to be potential bumps which could lead to an uptick in volatility, cautiouns the analysts.

The Fed's recent rate cut is not expected to matter much to domestic equities since it was largely expected, but the future policy path most certainly will, he added.