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Informist, Wednesday, Dec. 18, 2024

By Anjana Therese Antony

MUMBAI – The outcome of the US Federal Open Market Committee's decision on interest rates will lend cues to equity markets globally as well as India on Thursday, analysts said. Apart from the US Fed, the Bank of England and the Bank of Japan will also announce their monetary policy decisions on Thursday. "Traders are cutting their positions ahead of the Fed's announcement. As it (rate cut) is already factored in, we need to see what lies ahead for the Fed with respect to rates, which is what everyone wants to know," a head of research at a domestic broking firm said.  

Global markets are expecting a 25-basis-point reduction in federal fund rates to 4.25-4.50%. According to the CME FedWatch Tool, there is a 98.8% possibility that the Fed will cut rates by 25 bps and a 1.2% chance of keeping the rates steady. The US Fed started its rate-cutting cycle in September after keeping rates steady for more than a year. It surprised global investors with a 50-bps reduction in September and then a 25-bps cut in November. However, the apex bank's recent comments that it is not in a hurry to cut rates have dented sentiment. But the benign US inflation data and signs of a tighter labour market have again sparked optimism that the Fed will reduce rates further this time. 

The interest rate announcement in the US will turn the focus to Indian IT companies, which have major exposure to the US. After two consecutive days of decline, shares of most IT companies closed higher on Wednesday, with Wipro being the top gainer in the pack and closing 1.2% higher at INR 312.60 on the National Stock Exchange. The five IT stocks in the Nifty 50 together have a 13.76% weightage in the index. 

The Indian market saw major corrections in the last two months due to multiple factors, including concerns about a slowdown in rate cuts by major global central banks, expensive valuations, poor earnings growth, downgrades in earnings estimates, depreciation of the rupee, sharp foreign investor outflows, and crude oil price volatility. However, there has been an ease in the quantum of outflows, though a major recovery is not expected anytime soon.

The weekly expiry of Nifty 50 options contracts is also expected to lead to volatility towards the end of the trading session Thursday. Analysts said traders were adding short bets in the options chain on caution ahead of the US Fed's outcome. More than half of the positions of FIIs in index futures are short, which has been weighing on sentiment for more than three months.

Experts said foreign investors will make fresh buys only after valuations move to a comfortable level. Large-cap stocks are said to be in a better position than those in the mid-cap and small-cap space. "Given the steep rise in the valuation gap between large caps and SMIDs (small and mid-caps), we believe quality large-caps have a better risk-reward proposition vis--vis midcaps and small-caps hereon," Mirae Asset Sharekhan Research said in a report. 

On Wednesday, the Nifty 50 and BSE Sensex ended 0.6% lower each at 24198.85 points and 80182.20 points, respectively. The near-term support for the 50-stock index is pegged at 24000-23950 points and resistance at 24250-24280 points. However, the fall in India VIX, the gauge which measures the near-term nervousness in the market, indicated there are no major worries. The volatility gauge ended 0.8% lower at 14.3725. 

While the near-term outlook on the overall market remains slightly bearish due to expensive valuations and foreign investor outflows, experts are betting on a pickup in the government's capital expenditure cycle, which is expected to gain traction in the rest of the financial year. If so, this will benefit sectors such as defence, real estate, cement, and other construction-related companies, and hence, better earnings performance is anticipated for these players in the coming quarters.  End

Edited by Saji George Titus

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