With the US Federal Reserve's rate outcome due for announcement later on Wednesday night, a look into the history of the last three decades reveals Nifty's median returns of +1.6% following a 50 bps rate cut by the Fed. Meanwhile, a 25 bps cut has resulted in a median loss of 0.5%.
The above findings were from a Capitalmind Financial Services study, which showed that the Fed announced a 50 bps rate cut 10 times in the last 34 years while the most frequent action by the Central Bank has been an increase of 25 bps, which has been done 39 times.
The study also showcases a resilient Nifty, irrespective of the stance Fed has taken in this period. The 50-stock index has managed to end with gains on 50 occasions out of 78 announcements made by the Fed in this period.
The Fed announcement happens after Indian markets close and they react on the next day.
The study finds outliers as well. For instance, there was a nearly 7% drop in October 2008 following a 50 bps cut in the middle of the global meltdown during the GFC.
It further shows that after ending negative following Fed rate hikes, Nifty has recovered to end with gains on the next day. Moreover, Nifty has outpaced or at worst, matched the S&P 500 in local currency terms over the last two decades.
The median Nifty return on the day after the announcement is negative 0.2%.
The US Fed has had six alternating easing and tightening cycles over the last 34 years and for Indian markets, the most productive cycle was the US Fed’s easing cycle from July 1990 to February 1994 where Nifty witnessed a gain of 310%, Anoop Vijaykumar, Investments and Head of Research at Capitalmind highlighted.
It was followed by the tightening cycle in June 2004 to September 2007 where the Indian heartbeat index witnessed a gain of 202%, he added.
The only stretches of negative Nifty returns came during tightening cycles in February 1994 to July 1995 and March 1997 to September 1998, Vijaykumar said. In the former case, the 50-stock index fell by 23% while in the latter, it plunged 14%. 1995 was the only calendar year to witness both rate increases and decreases by the US Fed, this expert said.
Since the global financial crisis (GFC) in 2008, rates have been perennially low until 2016, when the Fed started raising rates after years of quantitative easing, the study said.
However, Covid-19 forced drastic measures from the US Central Bank leading to hikes in policy rates that were again reduced before the ensuing unprecedented inflation caused the Fed to raise rates quickly to levels not seen in over two decades.
“While easing US interest rates are directionally positive for equities in general, we should keep in mind interest rates are just one variable in a complex adaptive system that determines the direction of Indian equity markets”, added Vijaykumar.
The Fed will announce its decision later on Wednesday around 11:30 pm India time and the Street is expecting a cut of 25-50 bps.
Nifty fell on Wednesday fell to 25,377.55, down by 41 points or 0.16%. It scaled a new lifetime high of 25,482.20.
Also Read: Market Wrap: Sensex, Nifty end in red after recording lifetime highs as Infosys, TCS trigger fall
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
The above findings were from a Capitalmind Financial Services study, which showed that the Fed announced a 50 bps rate cut 10 times in the last 34 years while the most frequent action by the Central Bank has been an increase of 25 bps, which has been done 39 times.
The study also showcases a resilient Nifty, irrespective of the stance Fed has taken in this period. The 50-stock index has managed to end with gains on 50 occasions out of 78 announcements made by the Fed in this period.
The Fed announcement happens after Indian markets close and they react on the next day.
The study finds outliers as well. For instance, there was a nearly 7% drop in October 2008 following a 50 bps cut in the middle of the global meltdown during the GFC.
It further shows that after ending negative following Fed rate hikes, Nifty has recovered to end with gains on the next day. Moreover, Nifty has outpaced or at worst, matched the S&P 500 in local currency terms over the last two decades.
The median Nifty return on the day after the announcement is negative 0.2%.
The US Fed has had six alternating easing and tightening cycles over the last 34 years and for Indian markets, the most productive cycle was the US Fed’s easing cycle from July 1990 to February 1994 where Nifty witnessed a gain of 310%, Anoop Vijaykumar, Investments and Head of Research at Capitalmind highlighted.
It was followed by the tightening cycle in June 2004 to September 2007 where the Indian heartbeat index witnessed a gain of 202%, he added.
The only stretches of negative Nifty returns came during tightening cycles in February 1994 to July 1995 and March 1997 to September 1998, Vijaykumar said. In the former case, the 50-stock index fell by 23% while in the latter, it plunged 14%. 1995 was the only calendar year to witness both rate increases and decreases by the US Fed, this expert said.
Since the global financial crisis (GFC) in 2008, rates have been perennially low until 2016, when the Fed started raising rates after years of quantitative easing, the study said.
However, Covid-19 forced drastic measures from the US Central Bank leading to hikes in policy rates that were again reduced before the ensuing unprecedented inflation caused the Fed to raise rates quickly to levels not seen in over two decades.
“While easing US interest rates are directionally positive for equities in general, we should keep in mind interest rates are just one variable in a complex adaptive system that determines the direction of Indian equity markets”, added Vijaykumar.
The Fed will announce its decision later on Wednesday around 11:30 pm India time and the Street is expecting a cut of 25-50 bps.
Nifty fell on Wednesday fell to 25,377.55, down by 41 points or 0.16%. It scaled a new lifetime high of 25,482.20.
Also Read: Market Wrap: Sensex, Nifty end in red after recording lifetime highs as Infosys, TCS trigger fall
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
