Global Financial Markets Await US Fed’s Monetary Policy Review: Implications for Indian Markets

Global Financial Markets Await US Fed’s Monetary Policy Review: Implications for Indian Markets

As financial markets globally brace for the US Federal Reserve's monetary policy review on September 17-18, 2024, investors are keenly watching the potential interest rate cuts and their wider implications. The impact of these outcomes is not limited to the US but extends to emerging markets like India, where investor sentiment and financial strategies could be significantly influenced by the Fed’s decisions.

US Monetary Policy in Focus

Federal Reserve Chair Jerome Powell recently hinted at a possible interest rate cut, stating that the time has come to adjust monetary policy. However, Powell stopped short of specifying the quantum of the cut, leaving markets speculating about whether the rate reduction will be shallow or deep. 

The Federal Open Market Committee (FOMC) meeting is anticipated to mark the beginning of a monetary policy shift, as inflation in the US continues to moderate. Inflation has long been a challenge for US policymakers who aim to bring retail inflation down to the 2% target. The August inflation data showed positive trends, indicating a gradual alignment with this goal.

Speculations on the Quantum of Rate Cut

There is uncertainty about how much the Fed will lower rates. According to S&P Global Market Intelligence, investors are split, with equal numbers expecting 50 or 75 basis points worth of cuts in 2024. A 25 bps cut is already priced into the market, meaning that a significant reaction may only occur if the cut exceeds expectations.

The September FOMC meeting will provide critical guidance on inflation, growth, and future rate cut plans, with potential ripple effects across global markets, particularly in emerging economies.

Impact on Indian Markets

India, as one of the leading emerging markets, is also closely monitoring the outcome of the US Fed meeting. A reduction in US interest rates could trigger a shift in global liquidity, pushing funds toward markets with higher returns, such as India. 

Foreign Portfolio Investors (FPIs) have already begun shifting their strategy, moving from selling to buying in Indian markets, anticipating better returns amidst high expectations of rate cuts in the US. 

Reasons for FPI Shift to Indian Markets

There are two key reasons driving the FPI shift to India:

1. US Rate Cuts: The expectation of the Fed reducing rates has led to a forecasted decline in US bond yields, making emerging markets more attractive for investments.

2. Strong Indian Market Momentum: India’s market is showing resilience with strong momentum. Missing out on this growth potential could be seen as a strategic loss for FPIs.

Despite high valuations in Indian stocks being a concern, the overall sentiment remains positive, driven by robust domestic fundamentals.

Indian Market Outlook: Critical Week Ahead

The upcoming week will be crucial for Indian markets, with several key events on the horizon. The US Fed’s rate cut decision is expected to have an impact, but with 25 bps already priced in, the reaction may be muted unless a larger-than-expected cut materializes. 

According to Ajit Mishra, SVP, Research, Religare Broking, a 50 bps rate cut by the Fed could lead to a short-term positive reaction, particularly in emerging markets like India. However, this could also lead to concerns about the underlying health of the US economy, which may temper market optimism.

Domestically, the corporate earnings for Q2 2024 are forecasted to show improvement on a quarter-on-quarter (QoQ) basis, which could further support positive market sentiment. Investors will also be closely watching the release of wholesale inflation data in India.

Key Sectors to Watch in Indian Markets

Mishra advises investors to focus on key sectors that are expected to benefit from global and domestic trends:

1. Banking and Financials: These sectors are likely to perform well, driven by improving domestic liquidity and positive economic growth.

2. Information Technology (IT): As global liquidity improves with potential rate cuts, IT companies could benefit from increased spending by overseas clients.

3. Real Estate and Metals: These sectors could also see gains as infrastructure spending rises and demand for construction materials increases.

At the same time, investors should be cautious and selective in other sectors, given the evolving global economic landscape and the uncertainties surrounding future US monetary policy.

Conclusion: Balancing Global and Domestic Influences

The US Federal Reserve’s policy shift will have a significant bearing on global and Indian markets. A 50 bps rate cut by the Fed could spur positive sentiment in India, attracting further investments, especially from FPIs. However, caution is warranted as concerns about the US economy’s strength could temper gains. 

Domestically, improving corporate earnings and the strength of the Indian market could continue to drive upward momentum, making it an attractive destination for global investors. As the financial landscape evolves, Indian markets are expected to remain resilient and adaptive to both global cues and domestic developments.