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Informist, Tuesday, Aug 20, 2024

By Alina Geogy

MUMBAI – Investor sentiment is likely to remain positive Wednesday as expectations rise of the US Federal Reserve cutting key interest rates by at least 25 basis points at its meeting in September. This positive sentiment will help domestic benchmark indices, analysts said, though persistent worries about expensive valuations in some sectors and muted corporate earnings may limit gains.

The probability of a 25 bps rate cut at the Fed's next meeting has grown to 75.5% from nearly 72% Tuesday, according to the CME FedWatch tool. Meanwhile, there is a 24.5% expectation of a rate cut of 50 bps, while chances of rates being kept unchanged were nil, according to the data. The Fed kept key interest rates unchanged at its July meeting, steady for the 12th straight month.

Market participants await the minutes of the July meeting, due late Wednesday, for clues about a potential rate cut at the Fed's September meeting. Also on the watch list of market players are comments by Fed Chair Jerome Powell at a symposium in Jackson Hole, Wyoming, on Friday. Investors are placing steady bullish bets with a cautious approach as they await some indication of a rate cut next month from Powell's speech, Prashanth Tapse, senior vice-president of research, Mehta Equities, said in a note.

A rate cut by the Fed is likely considering recent macroeconomic data from the US, Rajnath Yadav, research analyst at Choice Equity Broking, said. The quantum of cut will, however, depend on further favourable data from the US, he said. The Fed will want to avoid a hard landing for the US economy, and this could even result in a 50 bps cut, he said. Inflationary pressures are persisting due to geopolitical issues, not due to supply-side restrictions, he added.

On the other hand, there is some nervousness about a rate cut as economic growth in the US has not slowed despite interest rates being higher for a while. Inflation is still at 2.9%, tangibly above the Fed's 2% target. Yadav of Choice Equity Broking feels that the upcoming US elections raise the chances of a rate cut, as it would benefit the party in power.

While both the US and domestic markets may be intertwined, they are independent when it comes to rate cuts, a research analyst at a domestic brokerage said. The macroeconomic factors for India are different, and the Reserve Bank of India need not blindly follow in the footsteps of its US counterpart, the analyst said. That is primarily because of the level of domestic inflation, as food inflation is still high though core inflation was 3.4% for July, the analyst said.

Global markets will also play a role in deciding investor sentiment Wednesday as fears of an impending recession in the US have faded after the latest data showed growth was still robust. Investors have been taking cues from the US equity market, where key indices have risen for eight consecutive sessions.

Today, the Nifty 50 ended 0.5% up at 24698.85 points, ending higher for the fourth session in a row. The resistance for the Nifty 50 is pegged at 24800 points while support is pegged at 24650 points. The Sensex also closed 0.5% higher today at 80802.86 points.

Among sectors, the information technology pack is expected to extend gains provided cues from the US market remain positive. The sector is expected to benefit most from a rate cut in the US as that would boost discretionary spending by US businesses, which account for a considerable portion of the revenue of IT firms. The Nifty IT index ended in the green for the seventh consecutive session today. However, Onkar Kelji, research analyst at IndSec Securities, warned that these stocks have gained a lot of late, and the market has discounted a rate cut of 25 bps.  End

Edited by Rajeev Pai

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