The US Federal Reserve Chairman Jerome Powell-led Federal Open Market Committee (FOMC) cut rates by 25 basis points on Wednesday. The rate cut was on expected lines, and came amidst rising pressure from US President Donald Trump. US is the world’s largest economy and any benchmark rate movement by its central bank has global implications.So what will be the impact of the US Fed rate cut on the Indian stock markets? Nifty50 and BSE Sensex, the Indian equity benchmark indices, are up over 5% year-to-date, but the stock market is still below its all-time high achieved in September last year.India’s fundamental growth story remains strong, but the stock market volatility has been particularly significant this year. The global trade war unleashed by US President Donald Trump has sent jitters, but Indian stock markets have in general underperformed this year, and Foreign Institutional Investors have pulled out billions of dollars. Will the US Federal Reserve’s decision to cut rates spur a rally or will Nifty50 and BSE Sensex remain range-bound in the coming weeks?
What US Federal Reserve Said
Flagging risks of slowing economic growth and job gains, the US Federal Reserve cut rates by 25 basis points, lowering the benchmark range to 4% to 4.25%. The FOMC has also signalled the possibility of two more rate cuts in this year, and one in 2026.“Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated,” said the US Fed in its statement.“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen,” it added.
How does the US Fed rate cut impact Indian stock markets?
Market experts are of the view that rate cut will be a net positive for the Indian stock markets, despite US stocks becoming attractive.Ankit Mandholia, Head Equity and Derivatives, Wealth Management, Motilal Oswal Financial Services explains, “Lower US yields reduce the relative appeal of American bonds, encouraging foreign investors to channel more funds into emerging markets like India. A softer dollar aids rupee stability, helping curb import inflation and supporting investor sentiment.” “Enhanced global liquidity typically fuels risk-on appetite, benefiting equities and credit markets,” he tells TOI. “While improved prospects for US markets may attract some flows back home, India’s robust growth outlook and earnings visibility ensure it retains a strong relative appeal. Overall, Fed easing enhances liquidity, reduces macro headwinds, and supports Indian stock performance,” he adds.So, will the Fed rate cut fuel a rally in the stock market? Experts say a 25 basis points cut is factored in.“The rate cut by the US Fed is partially discounted by domestic markets. Having said that, the rate cut by the US Fed augurs well for riskier assets like EM and commodities. Funds may move out of safe haven and may chase better yielding assets. Sentimentally, rate cut also augurs well for domestic IT and Metal companies in the short term,” Sunny Agrawal, Head – Fundamental Research at SBI Securities told TOI.Vijay Singh Gour, Fundamental Analyst at Miare Asset Sharekhan also believes the rate cut is factored in. “A dovish tone and more than two rate cuts in CY2025 could result in a weaker US Dollar, lower global yields, and a somewhat stronger Indian rupee. The scenario could potentially reverse significant Foreign Institutional Investor (FII) outflows observed during FY2025 and FY2026 (so far), which would likely cheer up the Indian stock markets,” he said.Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments points out that bond yields have already drifted down.He also notes that recent experience suggests that US Fed rate action has only a temporary and limited impact on the Indian stock market. The rate hikes by the US Fed since March 2022 didn’t impact the Indian stock market negatively, he tells TOI.“The market trend in the medium to long-term will be dictated by GDP growth and corporate earnings. When growth and corporate earnings improve, FIIs will turn buyers in India since India has the best long-term growth story among emerging markets,” he concludes.Santosh Pandey, President & Head, Nuvama Professional Clients group believes that global EMs will be in favour, including India by global investors post US rate cut.“While EMs and US S&P/NASDAQ have moved up substantially in the last 12-18 months, India is the only market where returns are flat to negative. Also in the global markets index, India’s weight has reduced due to other markets having moved up. Hence if the US-India tensions ease, India can be the market of the year for the calendar year 2026 backed by income tax cuts, repo rate being slashed and GST rationalisation,” he tells TOI.To sum up, Indian stock markets have already built in a rate cut, and while the US Federal Reserve’s commentary will be a short-term driver for the markets, the possible news of India-US trade deal being sealed in the coming months is expected to be a bigger sentiment mover.
