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 Fed’s dovish comments portend three rate cuts in CY24 and have turned market sentiment decisively. We expect the RBI to follow suit with concurrent rate cuts, Emkay Global Financial Services said in a report.

The impact would be more pronounced at the short end, given that long bonds have not tracked policy rates on the way up.

The impact on real economy should be muted, given the low levels of corporate leverage. Households benefit from lower mortgage rates but also lose on income from savings, while non-mortgage personal loans will see limited rate cuts, the report said.

This is, therefore, an atypical rate cycle and the impact on corporate earnings is limited.

Fed’s newly minted dovishness adds another bullish leg to the market. The earnings impact of lower rates is muted and is likely to play out with higher FPI flows driving the re-rating. This combines with post-election policy stability and continued strength in the capex and manufacturing cycle. Expect continued strength in equities, and use any technical corrections to add exposure, the report said.

FPI flows have been strong for most of 2HCY23. We see the momentum intensifying as risk on trades comes back into play. India will remain one of the most attractive emerging markets given its size and growth profile, especially considering the challenges of investing in China.

The initial leg of rate-cut cycles has had mixed results for equities over the last 15 years. The strike rate for a positive reaction is 3/4, mostly captured in the runup to the cut. The additional wrinkle in this cycle is that we are entering the rate-cut cycle on the back of strong growth. The sectoral performance around the rate cycle’s peaks is also mixed, the report said.