The US Federal Reserve recent monetary policy decisions have raised concerns about the future direction of global markets, including India. The Fed decision to implement a 25 basis point (bps) rate cut in December 2024, bringing the benchmark rate to 4.25-4.5 percent, was in line with market expectations. However, its cautious outlook for future rate cuts has sparked uncertainty, particularly regarding foreign investments in Indian markets.
Fed Cautious Outlook and Impact on Global Sentiment
The December policy meeting revealed the Fed more conservative stance, with only two rate cuts projected for 2025, a significant reduction from the previously expected four cuts. This shift is attributed to factors such as persistently low unemployment rates and stubborn inflation. This tempered outlook for aggressive monetary easing has raised concerns among investors.
Indian markets have already felt the impact of these changes, as the stock market experienced significant declines in mid-December. On December 19, Indian equities dropped by nearly 1 percent, with further losses on December 20, marking five consecutive days of declines. This was primarily driven by the US Fed projection of fewer rate cuts in the coming years, which triggered a sell-off on Wall Street and affected global sentiment.
FPI Outflows and Rupee Depreciation Weigh on Sentiment
Foreign Portfolio Investors (FPIs) have pulled out ₹922 crore from Indian equities, reflecting growing concerns over the US dollar strength, rising bond yields, and limited prospects for rate cuts. The Indian rupee also hit an all-time low of 85.34 against the dollar, adding to the market bearish sentiment.
Market experts are worried that the Fed cautious approach may further dampen investor confidence, leading to continued capital outflows from Indian markets. Swapnil Aggarwal, Director at VSRK Capital, notes that the Fed outlook could make Indian assets less attractive compared to US markets, where higher returns on debt could lure more investments.
Sector-Specific Opportunities Amidst Challenges
Despite these challenges, experts suggest that opportunities remain in specific sectors. Export-oriented sectors like IT and pharmaceuticals could benefit from a weaker rupee and sustained global demand. Investors are advised to focus on large-cap stocks, which are considered relatively safer during periods of heightened uncertainty.
Subho Moulik, CEO of Appreciate, recommends sector-specific strategies to navigate the current market landscape. While large-cap stocks may offer some protection, sectors such as IT, which are more resilient to global trends, could provide better returns. However, with foreign investors primarily targeting large-cap stocks, even these may not be entirely insulated from outflows.
Investment Outlook: Caution Amid Volatility
Experts like Justin Khoo, Senior Market Analyst at VT Markets, predict that sectors like IT, which benefit from a stronger USD, may see growth in the coming months. Conversely, interest-rate-sensitive sectors such as real estate, autos, and capital goods are likely to face challenges. With inflationary pressures and global volatility, the market sentiment remains cautious, making it a delicate time for investors.
As Indian markets grapple with global uncertainties, the long-term growth story of India remains intact. For now, investors are advised to stay focused on sector-specific opportunities and quality companies, ready to capitalize on potential dips in the market.
