Market Opens At Record High Following US Fed Rate Cut; Nifty Soars Past 25,500, Nifty Bank Above 53,000

Indian markets opened at new record highs on September 19, buoyed by mixed global cues. The Nifty crossed the 25,500 mark for the first time, gaining 166 points or 0.65%, to reach 25,543.50. Similarly, the Sensex surged by 558.35 points or 0.67%, climbing to 83,506.58.

Market breadth was positive with 1,858 shares advancing, 474 declining, and 119 remaining unchanged. Leading the Nifty gainers were LTIMindtree, NTPC, Wipro, Tech Mahindra, and Infosys. On the downside, ONGC and Bharti Airtel were among the few stocks registering losses.

Positive sentiment extended beyond largecap stocks, with the BSE Midcap and Smallcap indices gaining over 0.5%. Meanwhile, the India VIX, a key measure of market volatility, eased by nearly 9% to 12%.

This bullish outlook was fueled by the US Federal Reserve's decision to cut its benchmark interest rate by 50 basis points for the first time in four years. The reduction, bringing the rate to a range of 4.75% to 5%, was seen as a sign of progress in controlling inflation and managing economic risks. Projections suggest a total of 100 basis points in rate cuts by the end of the year, with the Fed expecting GDP growth to remain stable at 2%. Despite this, analysts warned that the Fed could slow the pace of future cuts if the economy remains strong.

Prashanth Tapse, Senior VP (Research) at Mehta Equities Ltd., commented, "This rate cut signals that inflation risks have eased, but volatility in Nifty is possible. A preferred strategy would be to buy Nifty at 25,300-25,350 and Bank Nifty at 52,300-52,600, while bearish momentum suggests selling IRCTC at 911-915."

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, added that the Fed's action could lead to a consolidation phase in equity markets with an upward bias. He emphasized Fed Chair Jerome Powell's optimistic statement that inflation is moving sustainably towards the 2% target. Vijayakumar also noted that further rate cuts are likely, with projections indicating a decline in rates to 4.4% by the end of 2024 and 3.4% by 2025, signaling significant reductions from the current levels.

However, Raj Patel, CMO of MintCFD, expressed caution, pointing out that the Fed's decision mirrors moves made in 2001 and 2007, both of which were followed by recessions within months. Patel remarked, "This dovish 50 basis point cut may suggest the Fed is more concerned about economic conditions than recent employment and retail sales data would indicate."

All 13 sectoral indices were trading in the green, with Nifty IT leading the rally. The IT index surged by 1.5 percent, driven by strong performances from Infosys, TCS, and LTIMindtree. Nifty Bank also advanced nearly 1 percent, bolstered by gains in HDFC Bank, Axis Bank, and ICICI Bank.

Among individual stocks, Grasim, Bajaj Auto, Axis Bank, LTIMindtree, and NTPC emerged as top gainers on the Nifty 50, posting increases of 1.5% to 3.7%. On the downside, Dr. Reddy's, Bajaj Finserv, BPCL, HCLTech, and ONGC were the weakest performers, declining between 0.1% and 1%.

On September 18, 2024, the US Federal Reserve announced its sixth policy decision of the year following a two-day Federal Open Market Committee (FOMC) meeting. In a move anticipated by many on Wall Street, the central bank slashed its benchmark interest rate by 50 basis points (bps), or half a percentage point, bringing it down to the range of 4.75% to 5%. This marks the first rate cut in four years, signalling a significant shift in the Fed's monetary policy.

The decision to cut the interest rate comes as inflation in the United States continues to moderate. Fed policymakers foresee the benchmark interest rate falling by another 50 basis points by the end of 2024, with additional reductions expected over the next two years. According to projections, the rate could drop by a full percentage point in 2025 and a further half-point in 2026, potentially ending up in the range of 2.75% to 3.00%.

This downward trajectory in interest rates reflects the Fed's evolving priorities. One basis point (bps) is equivalent to one-hundredth of a percentage point, and these incremental adjustments are part of the central bank's long-term strategy to balance inflation management with economic growth.

Inflation in the US has shown significant improvement since its peak in mid-2022 when it hit 9.1%. As of August 2024, inflation has declined to a three-year low of 2.5%, only slightly above the Fed's target of 2%. This steady decline has allowed the Fed to shift its focus from aggressive inflation control to supporting the broader economy, particularly the weakening job market.

Prior to this rate cut, the Fed had maintained a steady policy rate in the range of 5.25% to 5.50%, the highest level seen in over two decades. The central bank had kept interest rates unchanged for 14 consecutive months, part of its strategy to bring inflation under control. The Fed's recent rate hikes-beginning in March 2022-amounted to a cumulative increase of 5.25 percentage points.

Since July 2023, the central bank has kept rates on hold to anchor inflation, allowing time for its previous actions to take full effect. However, with inflation now largely under control, the Fed has shifted gears, focusing on economic growth and the job market.

In Hong Kong, the Monetary Authority (HKMA) quickly followed the US Fed's lead, cutting its base interest rate by 50 basis points to 5.25%. The HKMA's decision, which tracks the US Federal Reserve's moves, is expected to provide a boost to the region's economy, allowing for some easing of local interest rates.