How will the US Fed rate cut impact inflation, Indian markets and your investment portfolio?

U.S Fed cut rates- why does it matter?

Fifty basis points reduced the benchmark rate of the Federal Reserve in September 2024, the first reduction in four years, followed by two additional 25 basis point cuts.

This marks the beginning of an easing cycle after maintaining rates at a 23-year high.

Under Chairman Jerome Powell, the Fed expects only two additional rate cuts in 2025, following inflation data showing consumer prices remain "somewhat elevated" in the US economy.

When the world's largest economy adjusts its interest rates, it influences borrowing costs, currency valuations, and capital flows worldwide.

The Fed Chairman recently stated that "the time has come for policy to adjust," signalling confidence that inflation was steadily moving toward the target level.

How does it impact economic growth and inflation?

The Federal Open Market Committee (FOMC) members predicted that Personal Consumption Expenditures (PCE), a measure of inflation tracked by the Fed, would hit 2.3% in 2024 and then fall to 2.1% in 2025.

Lower interest rates stimulate economic activity by making credit cheaper for businesses and consumers.

However, the relationship between rate cuts and inflation remains delicate. This decision carries risks, such as the potential for increased inflation if the economy recovers too quickly.

The Fed walks a tightrope, lowering rates to support growth while ensuring inflation doesn't reignite.

What's the ripple effect on Indian markets and currency trends?

Foreign institutional investors constantly hunt for attractive returns.

With the upcoming rate cut by the Fed, the US Treasury securities yield will reduce, prompting investors to explore emerging markets like India for investment with higher returns.

On September 20, 2024, the FII net purchase in the Indian equity market was Rs 14,064.05 crore. This capital influx strengthens smallcase stocks and broader market indices.

The Federal Reserve's 50 basis points cut in interest rate is a positive factor for Indian equities as it increases global liquidity. It allows more funds from abroad to flow into investor destinations like India.

The Indian Rupee experiences appreciation pressure when foreign capital flows in.

As the foreign investment increases, it often boosts demand for the Indian currency as investors convert the foreign currency into INR so they can invest in Indian markets. This results in appreciation of the Indian rupee against the US dollar.

Also, lower global rates influence domestic policy. Against this backdrop, RBI is expected to maintain the status quo initially and potentially cut policy rates in December 2024.

However, geopolitical tensions and global economic fragmentation continue to change the investment landscape.

Sectors that can benefit and potential risks from this change

Stocks from sectors like Information Technology (IT) will directly benefit from rate cuts.

If the Federal Reserve begins cutting rates, borrowing costs in the US will decrease, which could encourage large companies to expand their IT budgets. And this potentially boosts order volumes for Indian IT firms as well.

Also, the export-oriented sectors gain competitive advantages. Lower U.S. rates may increase investments in India, pushing up stock prices.

The export benefits from a weaker dollar aid Indian exporters, especially in IT and tech, making them more competitive.

Financial services and banking sectors experience mixed impacts. While increased liquidity supports lending growth, domestic rate cuts compress interest margins.

Lower interest rates around the world and in India can lead to a rally in the Indian bond market as the yield on existing bonds becomes more attractive compared to new issues. It reduces the borrowing costs for the government and corporations.

Yet risks persist! Indian stock markets saw a sharp decline on December 19, 2024, following a sell-off in global markets triggered by the US Federal Reserve's projections for fewer rate cuts in 2025.

Market volatility during such periods requires careful portfolio management and risk assessment to protect long-term wealth.

Strategies for smallcase investors to navigate smartly through the changing interest rate cycle

The best smallcase portfolios adapt to interest rate cycles through strategic diversification. Rather than timing markets, focus on quality fundamentals.

Retail participation in Indian markets has grown significantly, with individual investors now holding substantial market share, demonstrating the power of systematic investing approaches.

You should consider diversified smallcase funds that balance growth and stability. The PINC Classic Compounder Fundamental portfolio focuses on quality companies with growth potential of 15-20% over three to five years, combining fundamental analysis with long-term compounding principles.

Here are some highly effective strategies that help in choosing the best smallcase to buy during rate cut cycles:

• Shifting allocation based on sectors: Shift allocations toward IT, export-oriented businesses, and interest-sensitive sectors that benefit from lower rates.
• Having a quality focus on companies: You must prioritise companies with strong balance sheets, consistent cash flows, and low debt levels that can weather economic uncertainties.
• Thematic Exposure is essential: You should align with long-term trends like digitalisation, infrastructure development, and sustainable energy that transcend short-term rate cycles.
• Make sure you do regular rebalancing: Make sure to update portfolios to maintain optimal allocation as market conditions evolve. This discipline ensures your investments stay aligned with goals.

SIP (Systematic Investment Plans) in smallcase stocks help average costs across market cycles. Consistency beats timing.

You should focus on accumulation during volatility rather than panic selling during corrections. Retail investors who maintain disciplined investment practices often outperform those who attempt to time market movements.

Conclusion

US Fed rate cuts create both opportunities and challenges for Indian investors.

Lower global rates typically support emerging market equities through increased capital flows and improved export competitiveness, though volatility remains a concern.

Successful investing during interest rate transitions requires a disciplined strategy and expert guidance.

We at PINC Wealth offer expert-curated, well-researched, and fundamentally strong smallcase portfolios that help you achieve your financial goals.

With over four decades of experience, our SEBI-registered research analysts design purpose-driven portfolios aligned with your risk appetite and investment horizon. Start your investment journey today! with confidence and clarity.