What will be the impact on Indian market if US Fed announces rate cut

New Delhi: The US Federal Reserve is scheduled to issue this year's final policy decision on Wednesday. Markets and analysts are assuming that the US central bank will cut the interest rate by 25 basis points. Due to the government's shutdown, the data on jobs and inflation of November is being received late, but the weak labour market and slow wage growth have given scope for the Fed to take a soft stance. The Fed is in a position where it will have to balance between tariff-generated inflation and the cooling job market.

Global brokerages like BofA, JP Morgan, Citigroup, Barclays, Deutsche Bank, UBS and Goldman Sachs are now expecting a rate range of 3.75— 4.00%. Nomura, Morgan Stanley and Standard Chartered have also changed their 'no cut' stance and expressed the possibility of a cut in December. There have already been reductions of 25-25 bps in September and October, indicating that the Fed has entered a cycle of gradual easing of monetary policy.

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In a report published by ET, Yardeni Research was quoted as saying that the market has already discounted the 25 bps rate cut. Now investors will be looking at whether Powell's tone remains dovish or hawkish. If Powell indicates further softening, then the risk on sentiment in global markets will be strong. However, the tariff pressure exerted on India and China during the Trump administration may complicate the inflation scenario.

Before the announcement, Wall Street indices remained in the narrow range, while European markets showed a mixed trend. Investors are waiting for a big stance, which will clear the direction of global fund flow and equity valuation in the first quarter of 2025.

The report states that Ross Maxwell of VT Markets believes that rate cuts or soft signals will prove positive for emerging markets like India. This will increase the chances of a reversal in FII investments, which were under pressure for a long time. The improvement in FII flows is expected to strengthen the rupee and support equity valuation. Especially the large-cap and financial sector can benefit from it.

If the Fed gives a signal that monetary policy can still remain tight for a long time, it will have adverse effects on Indian markets. In such a situation, FII outflows may continue, which will increase the pressure on the Rupee. Also, a sell-off trend may emerge in capital-intensive sectors like real estate, NBFCs and tech.

The real game-changer for Indian markets will be whether the Fed cuts only 25 bps or hints at further relaxation. The dovish stance could create a rallying atmosphere in D-Street in the coming weeks, while hawkish remarks could once again push the market into cautious mode.