Rate increases are generally followed by a negative day, while decreases are generally followed by an up day.
FinTech BizNews Service
Mumbai, September 18, 2024: According to a recent study by Capitalmind Financial Services, Indian markets have been resilient over the last two decades irrespective of Fed stance. It shows that Fed rate increases are generally followed by a negative day in Equity markets, which is followed by an up day. The study also reveals that Nifty has outpaced or, at worst, matched the S&P500 in local currency terms over the last two decades.
US Fed has had six alternating easing and tightening cycles over the last 34 years. 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%, followed by the tightening cycle in June 2004 to September 2007 where it witnessed a gain of 202%. The only stretches of negative Nifty returns came during tightening cycles in February 1994 to July 1995 at -23% and March 1997 to September 1998 at -14%. The median Nifty return on the day after the announcement (since the Fed announcement happens after India close) is -0.2%.
Anoop Vijaykumar, Investments and Head of Research, Capitalmind said “Of the 78 US Fed announcements in the last 34 years, Nifty has witnessed a positive change on 50 accounts on the following trading day of the announcement. 1995 was the only calendar year to witness both rate increases and decreases by the US Fed. Since the GFC in 2008, rates have been perennially low until 2016, when the Fed started raising rates after years of Quantitative Easing. However, COVID-19 called for drastic measures and rates were again reduced before the ensuing unprecedented inflation caused the Fed to raise rates quickly to levels not seen in over two decades.”
According to Capitalmind Financial Services study, in the last three decades, the most frequent Fed action has been an increase of 25 bps, which has been done 39 times. While, the Fed announced a 50bps rate cut 10 times in the last three decades, which has resulted in a median return of +1.6% for the Nifty. A 25bps cut has been followed by a more modest -0.5% median Nifty return. There are outliers as well, for example, the nearly 7% drop in October 2008 following a 50bps cut in the middle of the global meltdown during the GFC.
“Finally, 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”, adds Anoop Vijaykumar.
