The Federal Reserve reduced its benchmark interest rate by 0.25 percentage points, bringing it down to a range of 4.25% to 4.5%. However, it signaled plans for only two rate cuts in 2025, a reduction from the four cuts projected earlier. This adjustment reflects concerns over persistent inflation and a robust U.S. economy.
In response, Indian equity markets mirrored the global sell-off. The BSE Sensex dropped by 1,162.12 points to 79,020.08 in early trade, while the NSE Nifty tumbled 328.55 points to 23,870.30. All 30 blue-chip stocks on both indices traded in the red, with major players like Infosys, State Bank of India, Tata Steel, and Bajaj Finance among the top losers.
The rupee also faced significant pressure, depreciating to an all-time low against the U.S. dollar. Analysts attribute this decline to the anticipated slowdown in foreign capital inflows, as higher U.S. interest rates make American assets more attractive to investors. The depreciation of the rupee raises concerns about increased import costs and potential inflationary pressures within the domestic economy.
Sector-wise, IT and metal stocks led the downturn, reflecting investor concerns over the potential impact of a stronger dollar and reduced foreign investment. The Nifty IT index fell by 2.5%, while the Nifty Metal index declined by 2.8%. Market experts suggest that the reduced appetite for riskier assets could lead to further corrections in these sectors.
The Federal Reserve's cautious approach stems from persistent inflationary pressures. Despite a series of rate cuts aimed at stimulating economic growth, inflation remains above the Fed's 2% target. Federal Reserve Chair Jerome Powell emphasized the need for a measured approach, stating that while the economy shows signs of resilience, the central bank must remain vigilant against inflationary risks.
The ripple effects of the Fed's announcement were felt across global markets. Major U.S. indices, including the Dow Jones Industrial Average and the S&P 500, experienced significant declines, with the Dow dropping over 1,100 points. Asian markets followed suit, with indices in Tokyo, Shanghai, and Hong Kong recording substantial losses.
In India, the market capitalization of all listed companies on the BSE decreased by approximately ₹5.94 lakh crore, reflecting the widespread impact of the sell-off. Investors are now adopting a cautious stance, closely monitoring global economic indicators and central bank policies to gauge future market movements.
The bond market also reacted to the Fed's projections, with U.S. Treasury yields reaching nearly seven-month highs. The 10-year and 30-year Treasury yields rose as investors adjusted their expectations for future interest rates. Higher yields in the U.S. could lead to capital outflows from emerging markets like India, further pressuring the rupee and domestic financial markets.