US Fed rate cut: Weaker rupee sparks fears of foreign capital outflows, inflation
The US Fed cut its benchmark interest rate by 25 basis points to a target range of 4.25- 4.5 per cent on Wednesday. The 0.25-point rate cut, coupled with signals of reduced future cuts, has led to a significant sell-off in global markets including India.
The 30-share Sensex dropped 964.15 points, or 1.20 per cent, to end at 79,218.05. Similarly, the NSE Nifty50 ended down by 247.15 points, or 1.02 per cent, to settle at 23,951.70. The continued selling by foreign institutional investors (FIIs) has been a key reason behind the downturn.
According to analysts, in sync with global markets, the Indian stock market witnessed downward trend after the US Federal Reserve delivered its third consecutive rate cut.
“The rate cut could make Indian assets less attractive to foreign investors, potentially leading to capital outflows. Additionally, the rupee's continued decline to new lows has further soured sentiment,” Swapnil Aggarwal, Director, VSRK Capital, said.
On Thursday, the rupee dropped 14 paise and breached the crucial 85 level to close at an all-time low of Rs 85.08 against the US dollar. A prolonged depreciation of the rupee could widen the trade deficit and heighten inflationary pressures in the future due to higher import costs.
According to Justin Khoo, Senior Market Analyst, APAC (Asia Pacific region), VT Markets, the Foreign Portfolio Investments (FPIs) could experience possible outflows, putting downward pressure on market indices.
“The Indian Rupee (INR) may weaken against the US Dollar (USD), benefiting export-oriented sectors but posing challenges for import-heavy industries,” said Khoo.
Since, a depreciating rupee raises import costs, it would impact sectors like energy and aviation, while benefiting export-driven IT firms and pharmaceuticals. Interest-sensitive sectors such as real estate and autos may underperform due to higher borrowing costs.
According to stock market analysts, the investors should avoid panic selling during these fluctuations and focus on fundamentally strong securities with minimal exposure to global factors. Maintaining a calm and strategic approach will be critical in navigating this period of uncertainty.
Amid heightened volatility, analysts also suggest monitoring key support levels and exercising caution. Sectoral and stock-specific strategies are expected to dominate trading patterns as markets await clarity on global and domestic economic cues.
