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Any change in interest rates by the US Fed is generally seen as one of the key factors that decide the course of the Indian equity markets. However, a study by Capitalmind Financial Services shows that the Indian markets remained unaffected or marginally affected by such a change in the past.
The study found that the average Nifty return on the day after Fed’s announcement of increase or decrease in rate cuts in the last three decades is -0.2%. A decrease in rate by 25 bps has led to an average return of -0.5% while a decrease of 50 bps has led to an average return of +1.6%.
There have been periods when the effect of change in interest rate has been high. July 1990 to February 1994 saw Nifty gaining 310% when the interest rates were eased. Similarly, the period from June 2004 to September 2007 saw a 202% rise when the interest rates were tightened.
Interestingly, the study shows that since 2004, Nifty has done as well or better as S&P500 during the change in interest rates. The study also reveals that an increase in interest rate leads to equity markets going down the next day, which is followed by a rise.
Sharing his views on the findings of the study, Anoop Vijaykumar, Investments and Head of Research, Capitalmind said, “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.”
