Stocks, bonds may rally on Fed Chair Jerome Powell's rate cut cue

The yield on the benchmark 10-year government bond is expected to open around 4 basis points lower on Monday. It had settled at 6.86 per cent on Friday

The equity market and government bonds are expected to open on a positive note on Monday, following a decline in US Treasury yields after Federal Reserve (Fed) Chair Jerome Powell signalled that it’s time to cut interest rates.

Dealers also expect that the rupee will strengthen against the dollar on Monday.

The yield on the benchmark 10-year US Treasury bond fell by 7 basis points (bps) to 3.79 per cent after Powell’s comments. It was trading at 3.86 per cent on Friday when the Indian money markets closed.

Powell did not specify how much the US Federal Reserve might cut its key rate, but most analysts predict a 25-bp reduction in September.

 

“The time has come for policy to adjust,” Powell said on Friday at the Fed’s annual retreat in Jackson Hole, Wyoming. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

Experts suggest that while equity markets have fully priced in a 25-bp rate cut in September, they could gain between 0.5 per cent and 1 per cent due to the Fed chief’s clear indication of the start of a rate cut cycle. The US markets closed over 1 per cent higher on Friday, buoyed up by Powell’s comments.

The yield on the benchmark 10-year government bond is expected to open about 4 bps lower on Monday, having settled at 6.86 per cent on Friday.

“The market will open on a positive note; we might see the yield fall by 3-4 bps,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. “We’ll also need to see when the Reserve Bank of India (RBI) initiates rate cuts. Until we get clarity, yields might reverse,” he added.

So far this financial year (2024-25), the benchmark yield has fallen by 19 bps, while it has risen by 31 bps this calendar year. In August, the yield has softened by 6 bps.

The benchmark National Stock Exchange Nifty and S&P BSE Sensex have rallied over 3.5 per cent from this month’s lows, amid a rebound in global markets as fears of a US recession — triggered by early-month US unemployment data — have receded.

On Friday, the Sensex and Nifty closed at 81,086 and 24,823, respectively. Both indices are currently below their record highs of 82,129 and 25,031, reached on August 1.

“Market participants will respond positively to the dovish remarks by the US Fed Chair. Additionally, a weakening dollar and falling crude oil prices are positive for our markets. Domestically, investors will also keep an eye on economic data releases, including gross domestic product figures and infrastructure output,” said Ajit Mishra, senior vice-president of research at Religare Broking.

Foreign exchange traders, meanwhile, expect the rupee to open around 83.85 against the dollar. It had settled at 83.9 per dollar on Friday.

“The rupee should open around 83.85 per dollar, but this also depends on RBI intervention,” said Amit Pabari, managing director at CR Forex. “The rupee has been the worst-performing Asian currency so far. We’ll need to see on Monday morning whether the RBI intervenes. If they do, the rupee might continue within the current range,” he added.

So far this financial year, the rupee has depreciated by 0.6 per cent, and by 0.8 per cent this calendar year. In August, the local currency has depreciated by 0.2 per cent.