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The bulls on global equity markets charged ahead on Wednesday after the US Federal Reserve Chair Jerome Powell turned dovish. While the Federal Open Market Committee maintained interest rates at 5.25-5.5 percent for the ninth time in a row, a more confident narrative of softening US inflation and labour market signals the much-awaited rate cut in September.


The next obvious question on rates is -- how much and how many? Expectedly, while Powell has placed his case for rate cuts on the table, the rest is still uncertain. “It’s going to be inflation data, it’s going to be the employment data, it’s going to be the balance of risks as we see it — it’s going to be the totality of all of that,” said Powell in a presser.


To be sure, inflation, albeit elevated, is trending lower in the US and conditions in the labour market are close to where they were just before the pandemic. But the next challenge after a “pivot” would be to balance the risks to economic growth. The broad idea is to enable a soft landing for the economy. But reducing rates too slowly could weaken the economy, making optimists forecast two-three rate cuts in 2024.


The upshot: a US Fed rate cut, the first since the pandemic, will lower borrowing costs and boost loans, mortgages and consumption. In turn, economic growth augurs well for equity markets, which explains the sharp jump in S&P 500 and Nasdaq indices.


Cut to Indian equities, Anubhav Sahu from the MCPro Research team writes that the impact is positive for fund flows to emerging markets such as India, due to interest rate and growth differentials which also translate into rupee appreciation. Higher flows, along with sustained flows from domestic retail investors, should see indices scaling heights. “As part of these flows should find its way to new supply (the IPO pipeline), it should help in maintaining sane valuations in the secondary market,” he says.


That said, our markets watchdog, Securities and Exchange Board of India, is sniffing trouble from an overheated equity market fuelled higher by traders.  My colleague Shishir Asthana in this article points out that SEBI’s much-dreaded proposal to control retail traders' participation and protect smaller retail investors could cool off speculation in the derivatives market. “Reducing the number of weekly expiry indices is likely to reduce trading volume significantly,” says Asthana.

Even so, much depends on the Reserve Bank of India’s stance in the coming week. Will it toe the line of the US Fed, given that core inflation is trending lower and the government in its latest Economic Survey pointed out that the stubborn food inflation is mostly supply induced and cannot be influenced by rates? However, some economists argue that the central bank is unlikely to signal rate cuts in a hurry, unless growth starts to slow.

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Be that as it may, any sign of a rate cut by RBI may see the bulls leap over the fence.

Investing insights from our research team

Ola Electric IPO: Will it be an electrifying story of hope?

Ceigall India: Should you subscribe to this construction company IPO?

This long-term portfolio stock is now available at an attractive valuation

Coal India: Decent show in Q1 FY25; levers in place for long-term gain

Maruti’s Q1FY25: Maintains speed riding on a rich product mix

GAIL: Why we do not see an upside in the stock after a good Q1 performance

M&M Q1 FY25: Firing on both cylinders, outlook positive

Crompton Consumer: An excellent long-term buy and hold

Varun Beverages: Growth momentum sustains, profitability expands

360 ONE Wealth – strong start to FY25

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Banks get a Rs 8,500 crore worth pot of gold from the bottom of the pyramid

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Will the assassinations of Shukr and Haniyeh ignite a wider conflict in West Asia?

Scaling Beyond GenAI Pilots: Strategies for future growth

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Personal Finance

Lenders are cautious on higher NPA levels, but no alarm bells so far: Amit Diwan

Technical Picks: Infosys, Sun Pharmaceutical, Asian Paints and Polycab
(These are published every trading day before markets open and can be read on the app)

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