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Banking and Financial Stocks Set to Rally: Impact of US Fed Rate Cut on Indian Markets

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Published Date: 03 Sep 2024Updated Date: 31 Dec 20246 mins readBy MOFSL

The Indian stock market is set for an intriguing shift as banking and financial stocks, which have recently trailed behind benchmark indices, might be on the verge of a rally. This potential upswing comes amid rising anticipation of a rate cut from the US Federal Reserve. Despite the Reserve Bank of India (RBI) maintaining a hawkish stance, the possibility of a rate cut by the Fed could have a ripple effect on Indian equities, particularly in the financial sector.

Recent dovish signals from Fed Chair Jerome Powell have already sent ripples through global markets, with the Dow Jones Industrial Average gaining over 1%, accompanied by rallies in bonds and precious metals. The dollar index and US bond yields are pointing towards an expected rate cut at the upcoming FOMC meeting in September, with Powell’s comments further fuelling these expectations.

Powell remarked, “With a careful easing of policy restraint, there is a strong likelihood that the economy can return to 2% inflation while preserving a robust labour market.” This statement has bolstered the market’s conviction that a rate cut is on the horizon.

One key indicator, the US 10-year bond yield, currently stands at 3.8%, against the Fed’s fund rate of 5.25% to 5.50%. This disparity makes a rate cut in September seem almost certain in the eyes of many investors. The bond yield, serving as a global benchmark for interest rates, has significant implications across various asset classes, including equities, commodities, and currencies.

In 2024, the bond yield captured attention as it tested critical levels not seen since 2007, but failed to break through, raising concerns about the broader impacts on global financial markets. The situation is further complicated by the formation of a golden cross on the monthly chart in February 2024, a technical pattern that hasn’t been observed since 1991. With the US Presidential elections approaching, the potential consequences of these developments are becoming increasingly important.

The Nifty 50 recently reached a new all-time high of 25,333, demonstrating its strength. A potential Fed rate cut could serve as a catalyst for further gains, potentially giving bulls the momentum they need to push higher.

On July 31, Powell hinted that interest rates could be lowered in September if the US economy remains on its current trajectory. He suggested that if inflation continues to decrease and economic growth stays steady, a rate cut could be considered at the upcoming FOMC meeting.

Meanwhile, the RBI opted to keep interest rates steady in its August meeting, though two members of the Monetary Policy Committee (MPC) have expressed support for rate cuts. They argue that India’s growth is currently below its potential and may slow further due to weak consumption. Since January, India’s headline inflation (CPI) has hovered around 5%, while core inflation has remained below 4% since December 2023.

Lower interest rates typically benefit banks by boosting their net interest margins (NIM), as deposit rates tend to decline faster than lending rates, enhancing profitability. Given this potential shift, investors might find it wise to align their strategies with this anticipated change, which could positively impact financial stocks such as Bajaj Finserv, Chola Finance, Muthoot Finance, Shriram Finance, HDFC Bank, Federal Bank, ICICI Bank and IDFC First Bank.

Conclusion

As the market braces for the Fed’s decision, investors should carefully consider the potential benefits of positioning themselves ahead of this anticipated rate cut. The banking and financial sectors appear poised for a positive shift, making it a strategic time to reassess investment portfolios.

 

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Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price

 

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Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
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