US Fed rate cut fuel running out: What it means for the Indian stock market and your investment strategy | Stock Market News

In the stock markets, what lies ahead often matters more than what has already been done. If this sounds perplexing, consider the US Federal Reserve’s policy decision on December 18. The Fed lowered benchmark interest rates for the third time in a row, cutting by 25 basis points. Yet, major markets across the globe tumbled. Why? Because investors responded not to the Fed’s action but to its future trajectory.

The US central bank has projected only two more rate cuts of a quarter-percentage point by the end of 2025 as against the market’s expectations of three or four rate cuts.

With the December rate cuts, the US Federal Reserve has lowered rates by a full percentage point in 2024. The US central bank has set its short-term borrowing rate target at 4.25 cent to 4.50 per cent. The revised projections indicate that by the end of 2025, this rate could fall to 3.75 per cent to 4 per cent.

Stock markets were disappointed with the Fed’s projection. In the US, the S&P 500 and Nasdaq crashed 3 percent. Indian stock market benchmarks, the Sensex and the Nifty 50, suffered losses of a per cent each. European markets also reacted sharply, with CAC, DAX, and FTSE indices plunging up to 2 per cent.

US Fed revises rate cut projections: What it means for Indian stock market?

Experts believe that a hawkish Fed is negative for the Indian stock market, but they don’t expect it to cause major turmoil. Moreover, they remain positive about the India story.

“The Fed’s hawkish stance of reducing the number of rate cuts from previously anticipated four times to twice next year due to the low unemployment rate and sticky inflation may put investors on edge. The potential for reduced foreign capital inflows is a concern as the US debt market, with its more attractive returns, becomes a stronger alternative. This triggers the likelihood of a near-term pullback in the market,” said Subho Moulik, Founder and CEO of Appreciate.

“The India growth story is a long-term play. The market will eventually catch its breath, offering savvy investors a chance to buy quality companies on the dip,” said Moulik.

The Fed’s hawkish stance will strengthen the US dollar and cause bond yields to go up, which will weigh on the Indian rupee and accelerate foreign capital outflow. The Indian currency is already at an all-time low against the dollar, and it may weaken even further.

However, Anindya Banerjee, the head of currency and commodities at Kotak Securities, believes that with the RBI actively managing volatility through interventions, USD/INR is projected to gradually move toward 87 over the next six to nine months.

Amit Goel, co-founder and chief global strategist at Pace 360, underscored while this development presents a temporary setback for emerging markets, including Indian equities, the relatively light positioning in these markets before the Fed meeting provides room for recovery.

“We expect Indian equities to bottom out very soon and then go onto rally for the next four to five weeks as a reversion to the mean is imminent,” said Goel.

Is the Fed overestimating the inflation risk?

The Fed is aware of the possibility of a spike in inflation due to Donald Trump’s tariff policies. However, some experts are of the view that the central bank is overestimating the inflation risk.

Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Group underscored several mitigating factors that could constrain inflationary pressures arising from Donald Trump’s tariff policies.

“First, the US is among the most closed economies globally, with merchandise imports accounting for just 12 per cent of GDP. Even under a scenario of full tariff pass-through to consumer prices, the resultant inflationary impact is expected to be modest,” said Hajra.

“Second, a significant portion of the tariff burden is likely to be absorbed by exporters to the US, who may reduce margins to retain competitiveness rather than passing the full cost onto American consumers,” Hajra said.

“Finally, Trump’s anticipated push for increased domestic hydrocarbon production could significantly lower fuel prices, offering a counterbalance to inflationary forces elsewhere in the economy,” said Hajra.

Due to these factors, Hajra believes the Federal Reserve is overestimating the inflation outlook, paralleling its significant underestimation during 2022. Consequently, he expects the actual trajectory of rate cuts to exceed current projections by FOMC (Federal Open Market Committee) members.

What should Indian investors do?

Experts believe the Fed factor will not have a lasting impact on the Indian stock market, and they suggest investors should pick quality stocks during market declines.

“Given our view that inflationary pressures will remain subdued, we expect any negative market impact to be temporary. For Indian investors, any significant short-term correction should be viewed as an opportunity to accumulate equities rather than to reduce allocations. That said, it is important to realise that high average equity returns since 2020 are unlikely to continue in 2025. Therefore, investors should calibrate their return expectations downwards,” said Hajra.

Banerjee of Kotak Securities said Indian investors should remain vigilant and strategically diversify their portfolios to navigate this evolving macroeconomic environment.

Banerjee said fixed-income investors should expect upward pressure on Indian bond yields, making high-quality fixed-income instruments attractive.

Moulik of Appreciate said that large-cap stocks are often seen as a safe bet in times of market uncertainty. However, with foreign institutional investors (FIIs) typically investing more in the larger Indian companies, these stocks may not be entirely insulated from potential outflows.

“Investors may need to consider sector-specific strategies. Export-oriented sectors, such as IT and pharmaceuticals, can be pockets of strength. They could provide a greater margin of safety during this time,” said Moulik.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.