Market analysts believe that while the US Federal Reserve's 50 basis point rate decrease is a positive for global stock markets, including India, it does not change the picture immediately because it was generally predicted. More crucially, they feel that all eyes are now on the Reserve Bank of India (RBI), and that a rate drop by the central bank would send a strong signal while also delivering a boost to investor attitudes and flows -- both local and international institutions.
Moneycontrol contacted more than a dozen market professionals across several categories, including research analysts and investment managers. The general assessment was that the US Fed rate decrease was on expected lines, which explains the mild reaction on Thursday, and the emphasis will now move to the RBI, which is slated to meet next month. In fact, an MC Poll of 18 economists on Thursday revealed that only three projected a 25 basis point rate drop by the RBI in October.
"The attention is more on the RBI's reaction, which is likely to be delayed rather than quick. The market will focus on the RBI's pronouncements and prognosis rather than the Fed's actions," said Deepak Jasani, Head of Retail Research at HDFC Securities. "The RBI's attitude is likely to alter, and a rate decrease might occur at the next meeting. Overall, no big changes are expected, and the market is waiting to see what the RBI does next to assess the possible impact," Jasani further added.
In a similar vein, Emkay Global expects the RBI to follow the US Fed's lead and decrease interest rates in either October or December. "We believe the impact of rate cuts on the market will be limited." Select industries may perform well, but only if there is a second-order impact on earnings," the report stated.
This is significant because, while the US Fed's decision was eagerly anticipated, the broader market's 'buy on rumor, sell on news' attitude guaranteed that there was little excitement observable in Indian markets on Thursday. On Thursday, the benchmark Sensex gained just 236 points to settle at an all-time high of 83,184.80, while the wider Nifty rose 38.25 points to 25,415.80.
"In terms of market reaction, the first response may look as a 'knee-jerk' reaction, similar to the 'buy the rumor, sell the news' dynamic. However, on a global level, this is a positive trend for emerging markets, including India.Key industries such as financials, pharmaceuticals, and information technology, which are strongly related to global trends, are well-positioned to profit from increased demand," said Krishna Appala, Senior Research Analyst at Capitalmind Research.
Similarly, Deepak Ramaraju, Senior Fund Manager at Shriram AMC, believes that the markets will stay range-bound, but with a bullish tilt, since central banks in developing nations are likely to decrease interest rates.
The RBI is expected to decrease interest rates in December based on data. FII flows can be outbound in the near term, but when the US currency weakens, they can return to India, according to Ramaraju.
Foreign portfolio investors (FPIs) have been actively buying shares in the Indian stock market in recent months, with September net buying estimated at about $4 billion, a significant increase from the previous month's USD 873 million.
"There is a lot of chatter about how FII inflows may assist India, but it is not assured. Yes, the Fed rate decrease is good for capital flows, but there are other aspects to consider, such US elections, profitability, oil prices, and so on," said Trideep Bhattacharya, CIO at Edelweiss Asset Management.
"In terms of capital flows, lower interest rates tend to enhance capital inflows into emerging countries. The second-order impact is that industries that benefit from rate decreases will most likely see favorable benefits when interest rates decline. This climate is projected to boost Indian markets, including non-banking financial firms (NBFCs), real estate, and IT services," he noted.
"The US Fed rate cut largely met expectations. Our perspective on the equities market remains positive... We are waiting to see if the RBI would follow suit. The RBI has stated its intention to follow domestic cues, but given the status of domestic macroeconomics, especially continuing inflation fears, the RBI may not respond in complete accordance with recent developments," said Nirav Karkera, Head of Research at Fisdom.
"There might be a shift in posture, with a rate drop possible in the upcoming monetary policy statement. However, we do not expect the Reserve Bank of India to take a rapid action or equal the extent of the most recent rate drop," Karkera added.
On a different issue, some market analysts are recommending investors to be careful because values appear to be in the upper range and not quite in line with earnings and fundamentals.
"We have been predicting for some months that the Fed will decrease interest rates shortly, and this has already occurred. However, the rate decreases appear to be significant and may be driven by the US political agenda. We continue our cautious optimism about Indian markets and are concentrating on bottom-up stock ideas where values and profits are aligned," said Aniruddha Sarkar, Chief Investment Officer and Portfolio Manager at Quest Investment Advisors.
