After a dismal stock performance in July 2019 due to huge FPI outflow owing to the new surcharge imposition, the start of August has also not augured well for the Indian equities. This time the global headwinds has been largely responsible as after despite the widely expected rate cut by the Fed, the US central bank hinted it to be a "mid-cycle adjustment to policy" and no such future rate cuts will be largely imminent.
"By not coming out and promising more cuts in the future, the market appears to have interpreted this policy move as hawkish," Reuters quoted John Velis, forex and macro strategist at BNY Mellon, as saying.
It is to be noted that it is the first rate cut by the US after the economy was hit by recession in the year 2008.
This is though because market participants expected the rate cut cycle to continue and a cut of 75 basis points to be effected by the end of this year such as to avoid recession situation in the US. But the announcement after the policy statement was put in place came as a dampener which spooked global as well as Indian equities with huge sell-off in the markets.
Nonetheless, the rate cuts can be considered if the economic situation weakens further"As the committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labour market and inflation near its symmetric 2 percent objective," the policy statement said.
Why the rate cut by the Fed influences Indian equities?
The rate cut by Fed influences world markets because it has a significant impact on the foreign portfolio flows into the country. Notably, as much as 50% of global investor funds have their origin from the US and so a rate scenario in the US tends to have the biggest impact on global fund flow.
And as it is, in the Indian context, the surcharge imposition has led to a wide order outflow from the FPIs.