By V K Sharma

The Nifty rallied 1.71% last week as the US Federal Reserve began cutting interest rates. The FOMC, the policy-making arm of the US Federal Reserve slashed interest rates by fifty basis points to 4.75%-5.00%, at the end of its two-day rate-setting meeting on Wednesday last. The widely expected rate cut was the first since the Covid-19 pandemic over four years ago. The magnitude of the cut does indicate that the Fed was probably behind the curve, and it was playing catch up.

The FOMC’s decision, however, was not unanimous. Governor Michelle Bowman was the lone dissenter in the twelve-member committee. He opted for a smaller quarter-point cut. This was the first instance of a dissent by a Fed governor in 19 years.

Fed Chair Jerome Powell said in his post-meeting conference that the half-point cut was driven by downside risks to the labour market, and they have initiated the recalibration process towards a more neutral monetary policy. He did, however, clarify that the Fed was not in any rush to cut and would still take decisions meeting by meeting. The Fed’s dot plot indicates two quarter-point or one half-point rate cut in the rest of the calendar year.

The Nifty has now closed at a fresh new high at 25790. Of the 1.71% gains for the week, 1.48% or 86% have come on Friday itself. The large caps have again started outsmarting the mid and small caps. Small investors, usually in the smaller caps, were wondering what the fuss was about as their stocks did not participate in the rally whole-heartedly. The Nifty is mirroring the ETF money that is now pouring into the country.

Amongst sectoral indices, the private sector bank index has clearly outshone the Nifty, rising 3.78% during the week. Apart from the tailwind of the ETF buying, the change in the Fed’s stance from holding rates to an accommodative stance has also led to renewed interest. Financial services stocks also did well, while the IT and Pharma sector stocks twiddled their thumbs. The weakening of the Dollar index has lit a fire under precious metals and commodities.

The yield on the India 10-year bonds slipped marginally from 6.781 on Wednesday to 6.757 on Friday. But the slide in our bond yields has been muted due to hawkish comments from the RBI in the past. Falling interest rates augur well for Bond investors as the prices rise to adjust to the falling interest rates. Historically speaking, only half of the bond rally has occurred by the time the first cut arrives.

The direction of the equity market on the other hand is less clear. It is dependent on whether the Fed has staved off a recession or whether this rate relief came too late, only time will tell.
Going forward, the next resistance for the Nifty comes in at 26033 and 26,538. Support is in the 25,000 region.

(The author was head of market PCG & Capital Market Strategy, HDFC Securities)

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.