Sensex, Nifty Crash Over 1%; Will Fed’s 25 bps Rate Cut Bring More Pain to Emerging Markets?

Sensex, Nifty Crash: Benchmark indices crashed over a per cent during the morning trading session on Thursday after the Federal Reserve's 25 bps (basis points) rate cut decision. While global investors were already expecting a rate cut, what really pushed markets in red was the central bank's hint at slower cuts in the upcoming year 2025.

The Fed announced in a statement that policymakers voted 11-1 to lower the interest rates to a range of 4.25 per cent to 4.50 per cent. Besides Wall Street, which reacted negatively to the rate cut announcement, major emerging markets also saw a sharp decline.

Dow Jones Industrial Average marked one of its longest losing streaks yesterday night, as the index plunged by over 1,000 points. Nasdaq also followed the course and declined by over 3.5 per cent or 716 points. The S&P 500 index witnessed a decrease of nearly 3 per cent or 178 points.

As for the Indian stock market, the echoes of slower cuts sent shivers across the Dalal Street. At 10:00 am, Sensex was trading at 79,367.82, down by over 800 points. NSE Nifty50 witnessed a similar trail and decline by 254 points or 1.05 per cent.

Inflation Woes

Speaking on inflation the Fed chairman Jerome Powell mentioned in his speech that inflation has "eased significantly" but the levels remain "somewhat elevated" even now as compared to the central bank's target of 2 per cent.

Fed is now aligned with market expectations of 2 rate cuts in 2025 (and 2 more rate cuts in 2026) vs the September dot plot showing 4 cuts in 2025 itself, as per a report by Ionic Wealth.

"As we had been expecting, we have entered a shallower rate cut cycle, that continues to evolve with labor market conditions, policies under the Trump regime and inflation expectations which are now stickier than previously expected. We believe that the Fed pause will make it slightly difficult for EMs to walk down the path of easy monetary conditions," the report further added.

Will Emerging Markets see more pressure?

As of now, the answer is yes. Hong Kong's Hang Seng index decline by over a per cent or 198 points after the rate cut announcement. Japan's Nikkei also followed suit and declined by over 300 points.

If the Fed decides to slow the pace of its rate cut cycle, investors might refrain from putting their money to play in emerging markets. On top of this, a rising dollar is already making things worse alongside higher US bond yields.

"A hawkish pause, dollar spike and higher US bond yields are all signaling caution for Emerging Markets. We believe equity markets will chase earnings as global macros are unfavourable and rate cuts will be difficult as the pressure on EM FX (foreign exchange) will continue," the report said.

On the domestic front, all focus will now shift to how RBI plays out its interest rate play in the coming months, after a pause of nearly 2 years. Considering the current global macro outlook, the decision is not going to be an easy one.