What Fed cut? Here's Nifty’s 34-year streak that every investor in India should know

A recent study by Capitalmind Financial Services reveals the unwavering resilience of Indian markets over the past two decades, even in the face of fluctuating U.S. Federal Reserve interest rates. While Fed rate hikes typically lead to a negative day for Indian equities, the subsequent trading day often sees a rebound.

Moreover, the study underscores the superior performance of the Nifty 50 index compared to the S&P 500 in local currency terms over the last two decades. The Nifty has consistently outpaced or, at the very least, kept pace with its American counterpart.

Over the past 34 years, the U.S. Federal Reserve has implemented six alternating cycles of monetary easing and tightening. For Indian markets, the most fruitful period coincided with the Fed's easing cycle from July 1990 to February 1994, during which the Nifty surged by 310%. The subsequent tightening cycle from June 2004 to September 2007 also witnessed a substantial gain of 202%. Notably, negative Nifty returns were limited to two tightening cycles: February 1994 to July 1995 (-23%) and March 1997 to September 1998 (-14%). 

Interestingly, the median Nifty return on the day following a Fed rate announcement (which typically occurs after Indian markets close) is a modest -0.2%. This statistic further highlights the resilience of Indian equities in the face of global economic uncertainty.

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.