The recent downward revision of US jobs data, along with the minutes from the latest FOMC (Federal Open Market Committee) meeting, has strengthened expectations of a rate cut in September. Many experts are certain that the Fed will cut benchmark interest rates within the next few weeks. The next US FOMC meeting is scheduled for September 17-18.
On Wednesday, the US Labor Department reported that employers added far fewer jobs than initially estimated in the year through March. According to a Reuters report, the Labor Department revised its estimate for total payroll employment from April 2023 to March 2024, lowering it by 818,000 jobs. This reduction means that average monthly job gains during this period were about 174,000, down from the previously reported 242,000.
Besides, the Fed’s July 30-31 meeting minutes showed some policymakers favoured rate cuts last month. Although the US Fed kept the benchmark interest rate unchanged in the 5.25-5.50 per cent range in its July meeting, Fed Chair Jerome Powell sounded dovish and said a rate cut was possible in the next policy meeting.
The question now is the magnitude of the rate cut. Some experts expect the Fed to cut rates by 50 bps in September, while some say the Fed will cut rates by 25 bps in each of its next three policy meetings scheduled in September, November, and December.
Mint spoke to 10 experts to gather their insights on the potential magnitude of the September rate cut, its impact on the Indian stock market, and the sectors and stocks to buy to benefit from the rate cuts. Take a look:
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services
„I feel the rate cut can be 25 bps with a dovish message. Markets will be impacted only if the Fed doesn’t cut, which is unlikely. Indian market is now primarily driven by domestic liquidity. So, a Fed action is unlikely to influence the Indian market.“
Palka Arora Chopra, Director of Master Capital Services
„Although the indicators point to a potential rate decrease, the likelihood of a 50-basis point cut would mostly depend on how the Fed views the employment and inflation balance in the run-up to the September meeting. Traders see a 38 per cent chance of a 50-basis point drop next month, up from 33 per cent early expectation, and a 62 per cent chance of a 25-basis point reduction. A Fed rate reduction will result in a weaker US dollar, increased liquidity, cheaper borrowing costs, etc. Given these factors, Indian sectors that might benefit from a Fed rate cut are IT, BFSI, auto, and realty. Overall, the rate cuts will be welcomed positively by the Indian market because the RBI is following the US Federal Reserve’s lead when it comes to interest rates. Their announcements will spur additional rate cuts in India, which will enhance liquidity, attract capital inflows, and strengthen the value of the rupee.“
Manish Chowdhury, Head of Research, StoxBox
„Recent updates reveal that the US job market is weaker than initially reported, with 818,000 fewer jobs created than previously thought. This slower job growth could lead the Federal Reserve to opt for a more cautious rate cut of 25 basis points rather than a larger 50 basis point cut as they consider their first rate reduction since March 2020. Anticipated interest rate cuts are expected to revitalize tech spending by US corporations, which has been stalled for nearly two years. This expectation drives interest in rate-sensitive sectors, with the IT sector poised to benefit the most, followed by banking, auto, and real estate. Mphasis, with its mortgage business highly sensitive to interest rate changes, is anticipated to recover sharply. Similarly, Infosys and TCS are expected to reap significant benefits from the anticipated rate cuts.“
Amit Goel, Co-Founder & Chief Global Strategist, Pace 360
„The recent Fed meeting minutes and downward revision of US job growth data suggest a rate cut is likely in September. The Fed will carefully consider various economic indicators, including inflation data, that will be announced between now and the September Fed meeting before making its final decision. We believe that the Fed will eventually do a 25-bps cut in September as a 50-bps cut would convey an alarmist message for the health of the US economy, which the Fed would want to avoid. Rate cuts generally benefit sectors that are sensitive to interest rates. Here are some Indian sectors that could potentially benefit from a rate cut: Housing Finance Companies (HFCs): Lower interest rates reduce the cost of borrowing for home buyers, which can boost demand for housing loans and benefit HFCs. Banks: Rate cuts can improve banks‘ net interest margins (NIMs), the difference between the interest they earn on loans and the interest they pay on deposits. Automobiles: Lower interest rates make car loans more affordable, which can stimulate demand for automobiles.“
Abhishek Jain, Head of Research, Arihant Capital
„The latest Federal Reserve minutes suggest that the Fed is increasingly confident in achieving its 2 per cent inflation target. This heightened optimism raises the likelihood of a 50 basis point interest rate cut in September. Furthermore, the recent employment data has shown a positive trend, with the unemployment rate decreasing for the fourth consecutive month. Although it remains at a low 4.3 per cent, this indicates a potential slowdown in the job market. Indian companies likely to benefit from this include many in the IT sector. Additionally, companies that primarily supply US manufacturers, such as auto component firms like Vaibhav Global, may also see positive impacts due to their reliance on US consumer spending.“
Vidya Iyer, Head- Fixed Income, ICICI Prudential Life Insurance
„The recent renewed focus on the US labour market data is appropriate given the historical tendency for this data to weaken abruptly towards the end of the cycle. However, we believe that the US Fed will likely put more weight on other concurrent data, such as the business surveys and the US GDP data, rather than just relying on the backwards-looking revisions in the job growth figures. For the quantum of rate cuts by the Fed, the market will keenly watch out for other high-frequency labour market data points and the jobs report that will be available before the September Federal Open Market Committee (FOMC) meeting. Another round of weak jobs data could increase the possibility of 50 basis points cut and potentially result in quicker and deeper easing in this cycle. However, that is not our base case scenario. We expect the Fed to ease in steady clips of 25 basis points in the three meetings scheduled in CY24, starting September.“
Aamar Deo Singh, Senior Vice President of Research, Angel One
„Given the recent US economic data releases, weaker than expected July jobs report and cooling of the US inflation rate to 2.9 per cent, below the 3 per cent mark, for the first time since 2021, is being viewed by market participants as a positive cue, factoring in a minimum rate cut of 25 basis points to a maximum of 50 basis points in the US Fed’s September meet. Further, the probability of a rate cut in September is currently at around 70 per cent. Indian markets, as well as global markets, are expected to react positively to such an outcome. Still, markets, being lead indicators, generally tend to factor in as well in advance. It has been observed that financials, real estate, and consumer discretionary are a few sectors that usually perform well, as these are directly linked to the end consumer. Given that markets trade close to record highs, it would be prudent for the investors to stick to quality names and adopt a longer-term investment horizon in a stock/portfolio SIP mode to reap the benefits of long-term investing.“
Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities
„Though most FOMC members have voted in favour of a rate cut in its next meeting scheduled in September, the US Fed may take baby steps in its rate cut journey. This journey may encounter some roadblocks as unemployment is rising in the US economy, and at the same time, the US Central Bank hasn’t been able to rein in inflation. The US inflation still hovers around the upper side of its targeted band. It will be prudent for the US Fed to adopt a wait-and-watch approach before its rate-cut journey changes gears and gathers speed. As a macro factor, the rate-cut event may encourage news for the entire market rather than a stock-specific trigger. Having said that, it may prove to be more positive for precious metals like gold and silver going ahead.“
Sharad Chandra Shukla, Director, Mehta Equities and Prashanth Tapse, Senior VP – Research at Mehta Equities
„The Fed will cut rates, but it may be just 25 basis points, as they like to keep some leeway for the next cut. USA growth has not fallen significantly. However, a recession in 2025 is possible, and the possibility of a soft landing is greater. As far as India is concerned, we are now greatly dependent on domestic flows, but a fed cut will have a positive move. It may attract a bit of additional flow from FIIs. Fed rate cuts will positively impact Indian IT services, pharma, and rate-sensitive sectors like real estate and home financing, which may also perform well in the rally. IT stocks like Infosys and TCS can be front runners in large caps, and in real estate, we like Godrej Properties, while in home financing, we like the big banks- HDFC Bank and SBI only. In the pharma sector, we like Biocon due to technical factors, as the rest of the pharma stocks have already moved a lot in the last few days.“
In conclusion, the recent US Fed minutes suggest an almost certain 25-basis-point rate cut. However, some analysts are speculating a possible 50-basis-point reduction, pointing to the annual job report, which indicates a slowdown in the job market. While a rate cut seems inevitable, the exact magnitude will likely hinge on forthcoming economic data. Given the already bullish outlook in the sector, IT stocks will likely be the primary beneficiaries of a US rate cut. Metal stocks may also perform well due to declining dollar indexes and US bond yields. If the US implements a rate cut, we could see increased FII inflows in the Indian equity market. These inflows are likely to favour financial stocks driven by attractive valuations. The US rate cut is generally positive for emerging markets like India, as it typically encourages FII inflows into the Indian equity market. However, despite the rate cut being largely priced in, FIIs remain cautious due to the premium valuations in the Indian equity market. Among the stocks to buy, one may consider Persistent Systems and Mphasis from the IT pack, Hindalco and Vedanta from the metal pack, and Bajaj Finance and HDFC Bank from the financials sector.
Overall, the potential rate cut by the US Fed in September is anticipated to have a significant impact on both the US and Indian markets. The decision will not only influence interest rates but also affect various sectors and stocks, creating opportunities for investors to capitalize on the changes. As the market awaits the outcome of the September FOMC meeting, it will be interesting to see how the rate cut unfolds and its implications on the global economy.