According to a Capitalmind report, Indian markets have remained resilient over the last two decades irrespective of the Fed stance
The US Federal Reserve FOMC meeting is underway and the rate cut decision is scheduled to be announced today. The US Fed is expected to reduce interest rates for the first time after keeping the benchmark lending rate at a two-decade high of between 5.25 to 5.50 per cent for the previous 14 months.
The central bank may decide to cut its benchmark federal funds rate by 25 basis points or 50 basis points. However, data shows the Fed’s fight against inflation is not over yet. Core inflation increased 0.3 per cent in August, slightly above expectations, mainly due to rising housing costs.
Benchmark indices Sensex and Nifty were range-bound in Wednesday’s trade, much in line with Asian peers, as investors globally watch the outcome of the FOMC meeting. Analysts are expecting a small cut with a dovish Fed commentary on future rate cuts.
The Fed’s decision and commentary on growth will influence the short-term trajectory of Indian equity markets since those will impact foreign fund inflows and the outlook for US-dependent sectors such as IT and pharma.
How Indian markets have reacted to the Fed Rate Changes in the past?
According to a recent report by Capitalmind Financial Services, Indian markets have remained resilient over the last two decades irrespective of the Fed stance. Fed rate increases are generally followed by a negative day in Equity markets, which is followed by an up day. The report indicates that Nifty has either outperformed or, at the very least, matched the S&P 500 in local currency terms over the past two decades.
The US Federal Reserve has witnessed six alternating easing and tightening cycles in the last 34 years. For Indian markets, the most beneficial cycle was the US Fed’s easing phase from July 1990 to February 1994, during which Nifty gained 310 percent, followed by the tightening cycle from June 2004 to September 2007, where it recorded a gain of 202 percent. The only periods of negative Nifty returns occurred during tightening cycles from February 1994 to July 1995, with a drop of 23 percent, and from March 1997 to September 1998, with a decline of 14 percent.
“The median Nifty return on the day after the announcement (since the Fed announcement happens after India close) is -0.2 per cent, the report added.
Anoop Vijaykumar, investments and head of research at Capitalmind says 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 (GFC) in 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,” Vijaykumar said.
According to the Capitalmind report, over the past three decades, the most common action taken by the Fed has been a 25 basis point increase, which has occurred 39 times. The Fed has implemented a 50 basis point rate cut 10 times during this period, resulting in a median return of 1.6 percent for Nifty.
The report noted, “A 25 basis point cut has led to a more modest median Nifty return of -0.5 percent. There have also been outliers, such as the nearly 7 percent drop in October 2008 following a 50 basis point cut amid the global meltdown during the GFC.”
According to Vijaykumar, while easing US interest rates are 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.