After months of waiting, the US Federal Reserve finally delivered a 25-basis-point rate cut this week. The short-term Fed Funds rate, which banks charge each other for overnight loans, now stands at 4-4.25 percent. The cut was widely expected to boost market sentiment, but the US bourses remained motionless, while the global ones saw moderate jumps. Even though the central bank left the door open for at least two more rate cuts this year, Fed Chair Jerome Powell’s hawkish stance citing upside risks to inflation and downside risks to employment dampened overall sentiment. Just weeks ahead of the Fed meeting, American stock markets rallied anticipating a cut; but on D-day, there was muted response. While the Dow closed 0.57 percent higher, the broader S&P500 edged lower by 0.1 percent, followed by the tech-heavy Nasdaq Composite that fell 0.33 percent. Indian markets, too, cheered on with a moderate rally.
The key reason for such constrained enthusiasm is the Fed’s worry about slowing job growth. While Powell was cautious on inflation, jobs and growth, there were no clear signals from the other Fed members on where the rates will go from here. Traditionally, lower US rates soften the dollar and bond yields, prompting institutional investors to take refuge in emerging markets for better returns. But they have been on a sell-off spree here, having offloaded Indian stocks worth ₹1.06 lakh crore since July. Weak earnings, overstretched valuations, tariff-related uncertainties, the rupee’s weakness and aggravated outflows are the causes. However, despite a $15.6-billion foreign capital flight in 2024-25, the Nifty still delivered a 5 percent gain. Analysts reason that domestic growth triggers, a better monsoon, and expected improvement in earnings in the coming quarters should attract foreign institutional investors in due course.
The Fed rate cut may not have a significant bearing with the RBI, which is widely expected to maintain status quo. However, the recent GST rate cuts, which are expected to boost demand, and softening inflation offer the flexibility to extend the easing cycle. Headline inflation is expected to settle at 2.4 percent in 2025-26, significantly lower than the RBI’s 4 percent target, prompting policy watchers to not disclaim a 25 bps cut next month followed by another 25 bps cut in December, taking the repo rate to 5 percent at the end of 2025-26.