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Published: September 18, 2024
Updated: September 18, 2024

Fed Rate Cuts: Will FPI Inflows Boost Indian Stocks? Key Sectors to Watch

The potential for a rate cut by the US Federal Reserve is drawing attention to its impact on Foreign Portfolio Investments (FPIs) in India. Emkay Global, in its recent strategy note, suggests that a Fed easing cycle could trigger a "risk-on" rally in the US, which may accelerate FPI inflows into India. Such foreign inflows, while pushing momentum, might offer protection against market downsides, even if high valuations limit broader stock market gains.

FPI Flows Picking Up

While FPIs have been cautious for most of 2024, they appear ready to increase their exposure to India, despite elevated market valuations. As per NSDL data, FPIs have already purchased ₹33,281 crore worth of Indian stocks in September alone, with total net inflows for the year reaching ₹42,300 crore. Though this figure is modest compared to the ₹1.7 lakh crore invested in 2023, Emkay believes that there is ample room for further acceleration in FPI activity.

Limited Market-Wide Gains Expected

Emkay Global notes that although the US 10-year treasury bond yield peaked ten months ago, the resulting 37% rally in NSE-500 stocks since then has been one of the strongest, outperforming previous market cycles. This trend extends to US equity markets as well. However, Emkay warns that the broader stock market may not see significant upside from rate cuts. Gains are more likely to be concentrated in specific sectors that see a direct impact on earnings.

Banking Sector Outlook: Short-Term Relief, Long-Term Concerns

The banking sector has underperformed the broader market despite shifts in the bond market, reflecting a structural adjustment in valuations tied to lower growth expectations. Emkay suggests that banks may experience a short-term relief rally due to improved liquidity and deposit growth. However, the brokerage remains cautious, citing margin pressures and maintaining an underweight stance on the sector.

Autos and Real Estate: Further Growth or Plateau?

Autos and real estate typically thrive during a rate-cutting cycle, but these sectors have already shown significant outperformance. Emkay Global acknowledges the potential for further growth but suggests this may be stock-specific rather than sector-wide. Investors are advised to be selective in these areas.

IT and FMCG: Re-rating Opportunities Despite High Valuations

High-growth companies in sectors like IT and FMCG often benefit during an easing cycle. However, both sectors have seen a strong surge, making their current valuations less appealing. Despite this, Emkay identifies an emerging opportunity in the FMCG sector, driven by signs of a revival in mass and rural consumption. Increased welfare spending, declining inflation, and management insights support this recovery trend, even though premium consumption faces headwinds from tighter credit and job losses in white-collar sectors.

Sector-Specific Opportunities

In light of the Fed’s rate cuts, the broader market may see limited gains, but specific sectors such as FMCG, autos, and real estate could still offer promising investment opportunities. Investors should focus on selective stocks rather than taking a sector-wide approach.