In the past 34 years, the US Federal Reserve has cut and tightened interest rates six times.
The US Federal Reserve has cut its benchmark interest rate by 50 basis points last night (Indian time). This is the first rate cut after four years. It will affect India like the rest of the world’s markets. Earlier also, whenever the US Central Bank (Fed Reserve) has made any change in its rate, its effect has been seen on the Indian market as well. Before this rate cut by the Fed Reserve, the Governor of India’s central bank i.e. Reserve Bank of India (RBI), Shaktikanta Das, has recently said that the reduction in the policy interest rate in the country will depend on the long-term rate of inflation and not on monthly figures.
How did the Indian market react?
A recent report by CapitalMind Financial Services focuses on the resilience of Indian markets over the past two decades. According to a report by Livemint, it has been observed that equity markets usually trend negative on the day of the Fed’s interest rate hike announcement, but often bounce back the next day. The report says that over the past 20 years, the Nifty has consistently outperformed or at least kept pace with the S&P 500 in local currency terms.
According to the report, in the last 34 years, the US Federal Reserve has gone through six interest rate cuts and tightening cycles. For Indian markets, the most favourable period was the Fed’s interest rate cut cycle from July 1990 to February 1994. During this period, the Nifty saw a massive jump of 310 percent. The tightening cycle from June 2004 to September 2007 also proved to be beneficial with a gain of 202 percent. However, the Nifty also saw negative returns during two rate hikes. One, from February 1994 to July 1995 when it fell by 23 percent and the second, from March 1997 to September 1998, when it fell by 14%.
Positive reaction was seen on the cut earlier also
Domestic and global indices have reacted positively to the rate cuts during the 2019-20 period till today. In the six months before the rate cuts, the S&P 500 and Nifty had risen 12 per cent and 5 per cent, respectively. Even during the rate cuts, the S&P 500 and Nifty rose 15 per cent and 10 per cent, respectively. Consumer discretionary, real estate, financials and auto sectors in India had outperformed during this period.
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