Wealth management firm Capitalmind Financial Services said on September 18, 2024, that an uptick is expected in the Indian markets tomorrow should the US Federal Reserve go ahead with a rate cut today.
US Federal Reserve rate increases are generally followed by a negative day in equity markets and rate decreases are followed by an uptick the next day. As the market expects a 0.25 per cent rate cut tonight from the US Fed, given that the Fed has done the same 25 times, and Nifty saw a 0.5 per cent surge the following day, a surge is expected tomorrow as well.
Incidentally, Indian markets have been resilient over the last two decades irrespective of US Fed rate cuts or rate hikes, Capitalmind Financial Services said in a report. The study also reveals that the Nifty has outpaced or, at worst, matched the S&P500 in local currency terms over the last two decades.
US Fed Rate Cuts And Indian Markets
According to the Capitalmind Financial Services study, in the last three decades, the most frequent Fed action has been an increase of 25 basis points (bps), done 39 times. The Fed announced a 50 bps rate cut 10 times in the last three decades, which resulted in a median return of 1.6 per cent for the Nifty. A 25 bps cut was followed by a more modest -0.5 per cent (negative) median Nifty return. There are also outliers, such as the nearly 7 per cent drop in October 2008 following a 50 bps cut in the middle of the global meltdown.
US Fed has had six alternating easing and tightening cycles over the last 34 years. For Indian markets, the most productive cycle was the US Fed’s easing cycle from July 1990 to February 1994, where Nifty witnessed a gain of 310 per cent, followed by the tightening cycle from June 2004 to September 2007 where it witnessed a gain of 202 per cent.
The only stretches of negative Nifty returns came during tightening cycles in February 1994 to July 1995 when Nifty dipped 23 per cent, and from March 1997 to September 1998 when the Nifty dipped 14 per cent. The median Nifty return on the day after the announcement (since the Fed announcement happens after India close) is -0.2 per cent.
Anoop Vijaykumar, investments and head of research, Capitalmind, said: “Of the 78 US Fed announcements in the last 34 years, Nifty has witnessed a positive change on 50 accounts on the following trading day of the announcement. 1995 was the only calendar year to witness both rate increases and decreases by the US Fed. Since the global financial crisis of 2008, rates have been perennially low until 2016, when the Fed started raising rates after years of quantitative easing. However, Covid-19 called for drastic measures and rates were again reduced before the ensuing unprecedented inflation caused the Fed to raise rates quickly to levels not seen in over two decades.”
He added: “Finally, while easing US interest rates is directionally positive for equities in general, we should keep in mind interest rates are just one variable in a complex adaptive system that determines the direction of Indian equity markets.”
