US Fed Jerome Powell has already dropped the interest rate ball, signalling that rate cuts might be on the plate in the next FOMC meeting. Meanwhile, domestic expectations are rising around RBI taking a similar road. For markets, it seems like investors have already taken early cues from central bank decisions, but is it too soon to celebrate?
Almost a week after the US Federal Reserve dropped hints in the Jackson Hole Economic Symposium about potential rate cuts, markets seem to have taken a euphoric trajectory after a rather muted performance. And if there is any country where the ripple effects are seen the most, it's quite evidently the Indian stock market. Not only did the benchmark indices go on a bullish mood, but also hit fresh all-time highs.
BSE Sensex surged by nearly 1000 points to hit the 82,600 level mark. Whereas, NSE Nifty continues to wander around 25,200 level. What adds more to the optimistic picture, is the trajectory of India's volatility index, VIX, which has remained relatively calm. While multiple factors contributed to the surge witnessed in broader markets, expectations of a rate cut was likely the major driver.
This was evident during the first week of August as well, when market sentiment soured due to delays in rate cuts. However, investors are eagerly waiting for September, as not only will the US Fed, but the EU (European Union) and Japan will also announce their rate decisions.
New market highs in sight?
D-street analysts are already expecting new highs in benchmark indices next month. "Equity markets could see the markets inching further higher in the short to medium term. We may not be surprised to see the benchmark index moving towards 26,000 levels in September series. With the large caps showing resilience, we believe that a rate cut in the US would trigger inflows from foreign investors along with continued traction from the domestic side," Manish Chowdhury, head of research, StoxBox said.
Since the advent of the current financial year, domestic investors have been the major market movers, signalling a shift in base sentiment.
Meanwhile, according to data released by the market watchdog, Securities Exchange Board of India (Sebi), the USA remains the top contributor to Foreign Portfolio Investments (FPIs) in India.
As of March 31, 2024, the Assets Under Custody (AUC) from the US totalled Rs 27,24,420 crore, representing 39.2 per cent of the overall AUC. This clearly points out that any interest rate cut decision in US, could have a larger impact on the domestic market. However, considering the already prevailing euphoria in equities, analysts believe that some leverage might already be present in current stock prices because investors often try to predict these rate cuts ahead of time.
"It is important to consider that some effects of the rate cuts may already be priced into the markets, due to anticipatory adjustments that sometimes experienced delays because of varying data from the US," said Nikunj Saraf, vice president, Choice Wealth.
The recent concerns around valuations arose when markets were on consistent upward trend. Among all the factors impacting the mood of the market, the rate cut decision has perhaps been on top. So there is possibility that the markets may have celebrated the rate cut too early. And any further highs in equities might increase those valuation concerns back again.
However, the broader outlook remains positive. Foreign investments are likely to increase which will support corporate profitability, Saraf added.
Which sectors are likely to benefit?
Out of the total consolidated equity assets of Rs 64.2 lakh crore held by Foreign Portfolio Investors (FPIs), Rs 18.6 lakh crore are invested in the financial services sector. This is followed by investments in the oil, gas and consumable fuels sector, which amount to Rs 6 lakh crore.
These figures signal that the BFSI sector might experience a major boost. Given the recent credit-deposit imbalance and the higher cost of funds witnessed by banks, there could be much-needed relief on the way.
Saraf believes that the BFSI sector will come out on top, with increased lending activity and an expansion in Net Interest Margins (NIMs). The real estate and construction sectors should also see an upturn, as lower borrowing costs make financing for construction and property purchases more affordable.
Another important sector on the analyst's list is IT which is witnessing an improving trend owing to a revision in demand.
Considering the beginning of a rate cut cycle in the US and India, we remain constructive on IT, NBFC and real-estate sectors and expect these to outperform broader markets in the short to medium term, said Chowdhury.