US Fed rate cut: Nuvama cautions investors – past cuts did not lead to immediate equity boosts
Markets wanted a rate cut this time because the global economic slowdown had already started taking a toll on India’s economy.
The US Federal Reserve has cut interest rates by 25 basis points to 2-2.25%. This is the second rate cut this year, and it comes at a time when the global economy is slowing down. The Indian stock market has reacted positively to the news, with the Sensex and Nifty gaining over 1% in early trade.
However, Nuvama Alternative & Quantitative Research, a subsidiary of Nuvama Wealth Management, cautions investors against expecting an immediate boost to equity markets from the rate cut. The firm’s analysis of past rate cuts by the US Fed shows that there is no clear correlation between rate cuts and immediate gains in equity markets.
In the past, rate cuts have sometimes been followed by a period of consolidation or even a decline in equity markets.
Nuvama’s research shows that in the past 10 instances of rate cuts by the US Fed, the Indian equity market has reacted positively only 50% of the time. In the remaining 50% of cases, the market either remained flat or declined in the immediate aftermath of the rate cut.
In fact, in some cases, rate cuts have even been followed by a period of consolidation or even a decline in equity markets. For example, in 2019, the US Fed cut rates three times, but the Indian equity market declined by over 10% during that period.
Nuvama advises investors to take a long-term view of the market and not to make investment decisions based solely on short-term factors such as rate cuts.
Nuvama advises investors to take a long-term view of the market and not to make investment decisions based solely on short-term factors such as rate cuts. The firm believes that the current economic slowdown is likely to be temporary, and that the Indian economy is still on track for long-term growth.
Investors should therefore focus on investing in companies with strong fundamentals and a long-term growth outlook. They should also be patient and not expect immediate gains from short-term events such as rate cuts.
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