Interest Rate Cut in the US and FII Outflows from India

In the week gone by, global stock markets remained subdued as the Federal Reserve in its December policy meeting reduced rate cut projection for 2025 to just two from four rate cuts projected in its September 2024 meeting. This cautious outlook disappointed those hoping for more aggressive rate reductions next year. In this blog, we’ll know in detail what happened last week (December 16, 2024 to December 20, 2024) all across the globe.

Fed Reduced Interest Rate

At the meeting, the Federal Reserve reduced interest rates by 0.25%, bringing them down to 4.5%. However, it also revised its 2025 interest rate forecast upward from 3.5% to 4.0%, reflecting ongoing concerns about inflationary pressures.

The Fed’s stance suggests it anticipates persistent inflation above its 2% target and remains committed to its “higher-for-longer” approach to monetary policy. This policy aims to combat inflation while mitigating risks to economic stability.

Despite this hawkish stance, the U.S. economy showed resilience, with the Commerce Department’s final estimate for third-quarter GDP growth indicating an annualized expansion of 3.1%.

Additionally, November witnessed the largest annual increase in existing home sales in over three years. Meanwhile, political uncertainty loomed over U.S. markets as the possibility of a government shutdown gained traction. The bill incorporated Trump’s demands for increased government spending and a raised debt ceiling.

However, the spending bill was rejected in a 174-235 vote in the House of Representatives, with several Republican senators also publicly opposing the President-elect. This new bill replaced a previously negotiated bipartisan agreement on government spending after both Trump and Tesla CEO Elon Musk voiced their opposition to the original deal.

Japan Maintains the Interest Rate

In contrast, the Bank of Japan (BoJ) surprised markets by maintaining its interest rates, alleviating some global selling pressure. Japan’s economy performed better than initially estimated during the July-September quarter, driven by upward revisions in capital investments and exports.

This raised expectations of a potential near-term interest rate hike by the BoJ. Over in China, the central bank opted to keep its market-based benchmark lending rates unchanged, with the one-year loan prime rate (LPR) holding steady at 3.1%.

FII Selling Continued in India

On the domestic front, Indian markets mirrored the global sell-off, reacting to the U.S. Fed’s hawkish tone on interest rates. Rate-sensitive sectors such as banking and real estate bore the brunt of this decline.

Foreign Institutional Investor (FII) outflows added to the cautious sentiment, prompting a strategic shift among investors toward defensive sectors like pharmaceuticals, which outperformed during the week.

Despite the prevailing uncertainty, there are signs of optimism for India’s economy. Analysts predict that gradual improvements in consumption demand and investments driven by both public and private sectors due to monetary easing will help India achieve a projected growth rate of 6.6% for the financial year 2025-2026 (FY26). This would mark a modest improvement compared to the revised forecast of 6.4% for the current financial year.

Conclusion

Looking ahead, domestic market movements will likely depend on global cues, macroeconomic indicators, and institutional investment flows. Key factors to monitor include crude oil prices and fluctuations in the rupee’s exchange rate, both of which will play a pivotal role in shaping market sentiment and trends. So, open Demat account with SMC Global Securities and invest as per your investment objective and risk profile.

Reference:
SMC Global Securities’ Research Team

Author: All Content is verified by SMC Global Securities.