Indian stock market: US Fed rate cut to treasury yields — 5 key concerns that investors must not overlook

Indian stock market: The correction in the Indian stock market, which began in October last year, remains relentless as a confluence of factors—including stretched valuations, weak quarterly earnings, a strengthening US dollar, rising bond yields, and slowing economic growth—continues to keep investors nervous.

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On a monthly scale, the benchmark index, Nifty 50, has been down since October. It is down 11 per cent from its all-time high of 26,277.35, which it hit on 27 September last year.

The short-term outlook appears challenging, with several headwinds ahead. However, experts remain optimistic about the Indian stock market’s prospects over the medium to long term.

“The market remains under strain, with even minor pullbacks attracting selling pressure. In the absence of any clear signs of a trend reversal, particularly in the banking index, traders are advised to use rebounds as shorting opportunities,” Ajit Mishra, SVP of Research at Religare Broking, said.

“Caution should remain a priority, with a focus on robust risk management. Additionally, as the earnings season kicks off, erratic market swings are likely to intensify. Adopting a hedged approach and maintaining disciplined position sizing is recommended for navigating the current conditions,” said Mishra.

5 key concerns for Indian investors

Stock market experts highlight five key concerns that Indian stock market investors must not overlook.

1. The US Federal Reserve’s interest rate path

Hopes for further rate cuts by the US Fed are diminishing. The minutes of the US central bank’s last policy meeting indicate that policymakers see little chance of additional rate cuts, as they expect inflation to rise in 2025.

Recent US macro data have indicated the US economy remains strong, further weighing on the prospects of rate cuts. Meanwhile, the US job growth exceeded estimates, raising doubts about Fed rate cuts in the near future.

See more : Dow, S&P 500, Nasdaq futures sell off as government shutdown looms, Fed’s preferred inflation gauge on deck

Data showed 2,56,000 job gains in December, significantly above the 1,60,000 expected by economists in a Reuters poll. The unemployment rate eased to 4.1 per cent from 4.2 per cent.

2. The Trump factor

Donald Trump will assume office on January 20. His policies on tariffs will be a key factor that will decide the course of the global market. Currently, the uncertainty about Trump’s policies in the market is high.

“The global uncertainty pertains to the potential actions of President-elect Trump. Trump’s stated declarations – hiking tariffs, curbing inflation and tax cuts – are inflationary. Therefore, he is unlikely to walk the talk except in tax cuts,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, observed.

“Markets have partly discounted Trump’s threats, as reflected in the dollar index rising to 109 and the 10-year US bond yield shooting up to 4.79 per cent. If Trump prefers to negotiate after assuming office, the dollar index and bond yields could start coming down. From the Indian market perspective, this may be positive since FIIs will pause selling in such a scenario,” said Vijayakumar.

3. Hardening US treasury yields

A sustained rise in the US treasury yields, amid growing anticipation of a narrower Fed rate cut path, has been a prime reason behind the heavy outflow of foreign capital from the Indian market. So far in January, foreign portfolio investors (FPIs) have sold Indian equities worth nearly ₹21,350 crore, following a selloff of approximately ₹46,000 crore in November and a staggering ₹1,14,446 crore in October.

The benchmark US 10-year bond yields recently jumped to 4.79 per cent, its highest level since November 2023.

When bond yields in the US rise, FPIs sell off risker equities of emerging markets like India and invest the money into US treasuries as they offer almost risk-free returns. In the case of India, the selloff is steep this time because of the stretched valuation of the Indian stock market.

4. Earnings growth

After disappointing Q1 and Q2 earnings, all eyes are on India Inc.’s ongoing Q3 earnings. Experts do not expect an outright recovery. Still, they expect some pockets, such as IT, to show some recovery.

“If the Indian market is to recover, we need positive data on the growth and earnings front. Q3 results may be slightly better, but growth recovery will be slow and gradual,” said Vijayakumar.

5. The macro picture

See more : What Does the Future Look Like for the Stock Market? History Offers a Clear Answer.

The Indian economy has seen a moderation in the last three quarters. India’s gross domestic product (GDP) is expected to grow by 6.4 per cent in the financial year 2024-25, according to the Ministry of Statistics and Programme Implementation’s (MoSPI) official release on Tuesday, January 7. This marks a four-year low and a fall from its 8.2 per cent growth in the financial year 2024-25.

Recently, the State Bank of India (SBI) revised its forecast for India’s FY25 GDP growth to 6.3 per cent, which is slightly less than the 6.4 per cent estimate from the National Statistical Office (NSO).

Moreover, according to a United Nations report, the Indian economy is projected to expand by 6.6 per cent in 2025.

Experts observe that the slowdown in growth is among the top worries for the market. Many sectors are witnessing growth in single digits. Recovery in urban consumption and an increase in government capex are the key factors determining growth in the Indian economy.

Apart from the above mentioned factors, disappointment from the Union Budget 2025, elevated inflation prints and any escalation in geopolitical tensions also remain among the key concerns for investors. 

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.