What does the US Fed rate cut mean for the Indian stock market as Powell hints at more easing ahead?

The US Federal Reserve decided to cut the benchmark interest rate by 25 basis points on Wednesday, September 17, amid signs of growing stress in the labour market.

The FOMC voted by an 11:1 majority to cut the federal funds rate by 25 bps and bring it down to a range of 4 per cent to 4.25 per cent.

The Fed's policy decision was largely in line with expectations. The central bank did give subtle hints of further easing in the coming months, but it emphasised that the policy decisions will remain anchored to incoming data and evolving situations.

"The median participant projects that the appropriate level of the federal funds rate will be 3.6 per cent at the end of this year, 3.4 per cent at the end of 2026, and 3.1 per cent at the end of 2027. This path is 1/4 percentage point (25 bps) lower than projected in June," said Fed Chair Jerome Powell.

"As is always the case, these individual forecasts are subject to uncertainty, and they are not a committee plan or decision. Policy is not on a preset course," Powell added.

Fed's mixed signals triggered volatility in the US market. Dow Jones jumped about 500 points but eased soon, only to turn higher again.

Experts believe the market had already discounted a 25 bps rate cut, so the Fed's September rate cut may have a limited impact on the Indian stock market. However, Powell's dovish tone could influence investors' risk appetite.

"A 25 bps rate cut won't boost the Indian stock market as it is largely discounted. A cumulative 50 bps or even bigger cut will be a positive for the Indian market," said G. Chokkalingam, founder and head of research at Equinomics Research Private Limited.

An overall 75-100 rate reduction will be positive for emerging markets like India, as it will ease the US dollar and bond yields and may trigger foreign capital inflows.

"Should the Fed go for one or two additional reductions this year, global risk sentiment may improve — lifting equities, including Indian markets, while easing bond yields and pressuring the dollar," said Ajit Mishra, SVP of research at Religare Broking.

Mishra believes select IT, banking and financial stocks, including TCS, HCL Tech, Infosys, HDFC Bank, Kotak Mahindra Bank, SBI, PFC, Bajaj Finance, and M&M Finance, may react on Thursday due to the Fed's policy decision.

VK Vijayakumar, Chief Investment Strategist at Geojit Investments, underscored that US Fed Chair Jerome Powell described the 25 bp rate cut as a “risk management cut.” The focus of the Fed commentary was on managing emerging possible risks.

Powell described the base case scenario as a “one time shift in inflation” but added that “ inflation may remain persistent and that is a risk to be managed.” That is why the 25 bp cut is described as a risk management cut.

"The Fed indicated and the market expects two more rate cuts this year. However, the expected and discounted rate cut didn’t trigger any reaction in the market. The Fed rate decision is unlikely to impact the Indian market," said Vijayakumar.

The key trigger for the domestic market will be a potential India–US trade deal. At present, sentiment is being driven by expectations of such a deal and optimism about government reforms.

"The ongoing rally in the market is driven by expectations regarding the outcome of the reforms being implemented in the economy, particularly the GST reforms. Expectations about a US-India trade deal resulting in the elimination of the 25% penal tariff are also aiding the rally. This trend is likely to continue," Vijayakumar said.

The Fed has to make tougher policy choices as it will need to balance controlling inflation with supporting growth.

According to Madhavi Arora, Chief Economist at Emkay Global Financial Services, if the central bank adopts a more accommodative stance, it could give central banks in emerging markets, including the Reserve Bank of India (RBI), greater flexibility to maintain or ease their own policies.

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stories by Nishant Kumar

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