After the Reserve Bank of India (RBI), the US Federal Reserve, too, has cut benchmark interest rates, creating a macro-favourable environment for equities. On December 5, the RBI cut the repo rate by 25 basis points to bring it to 5.25%, and also revised GDP growth estimates upwards and inflation forecast downwards. On December 10, the US Federal Open Market Committee (FOMC) cut the federal funds rate for the third consecutive time on December 10, bringing it to 3.50%–3.75%, its lowest level since 2022.
Rate cuts are positive triggers for the market, as they make borrowings cheaper and liquidity easier, improving the profitability of companies. However, the markets have given a measured response to the recent rate cuts. For example, the Sensex rose by 0.52% after the RBI cut rates, but declined for the next three consecutive sessions, falling overall by 1.5%. Similarly, the 30-share index fell by 0.30% in the morning session on Thursday after the US Fed cut rates. The index, however, erased losses and ended 0.51% higher.
The Indian stock market remained volatile after these rate cuts because the move was largely priced in. In addition, the domestic market is grappling with two major headwinds — the delay in the India–US trade deal and sustained selling by foreign institutional investors (FIIs).
“Despite rate cuts and a healthy earnings outlook, markets remain range-bound because several macro headwinds continue to overshadow the positives. A stronger US dollar is keeping FIIs cautious as currency risk remains unfavourable. The recent 25 bps Fed cut was fully priced in, but the message of sticky inflation and fewer rate cuts ahead has dampened global risk appetite,” Sudeep Shah, the Head of Technical and Derivatives Research at SBI Securities, said.
“Slow progress in US–India trade discussions is another overhang, restricting fresh foreign flows. Adding to this, the Bank of Japan’s rare tightening move has unsettled global carry trades, triggering volatility across emerging markets. India’s nominal GDP growth trending below expectations has also limited broad-based earnings upgrades,” said Shah.
So, the question is: Is it time to change investment strategy? What should be our investment strategy for gold and equities in the wake of rate cuts?
Focus on fundamentals
Rate cuts are fine, but investors must focus on fundamentals. Valuations of mid and small-cap segments are still high, and they need strong earnings growth to justify the valuation.
Real GDP growth is strong, but nominal GDP is only around 8.7%. If inflation stays very low, strong real growth won’t translate into strong earnings.
Markets are waiting for conviction that the good news can translate into durable earnings and stable inflows.
“A decisive uptrend is likely only when these macro headwinds ease and when earnings visibility, global liquidity, and risk appetite begin to align,” said Shah.
Investment strategy for gold and equities
For equities, experts say it is time to focus on large-caps and select mid and small-caps for the long term.
“Easing inflation, RBI’s pro-growth stance, GST reforms and expected improvement in liquidity would aid market activity. Large-cap equities and select mid and small-cap ideas remain preferred choices for long-term investment,” said Gautam Kalia, Head – Investment Solutions and Distribution, Mirae Asset Sharekhan.
Investors must keep gold as a hedge against global uncertainties.
“Gold prices have been trending above $4,000 since the first week of December and reacted positively following the Fed’s rate-cut announcement. We believe it is prudent to maintain some allocation to gold and silver as a hedge against global uncertainties, given factors such as central bank diversification, industrial demand, and geopolitical risks, which are likely to sustain momentum,” said Kalia.
Naveen Vyas, Senior Vice President at Anand Rathi Global Finance, pointed out that with the RBI cutting policy rates by 125 bps and the US Federal Reserve reducing rates by 75 bps in 2025, the macro environment has turned more favourable for increasing exposure to Indian equities.
“A lower interest-rate cycle generally enhances the relative attractiveness of emerging markets like India for foreign investors. Domestically as well, interest-rate–sensitive consumption sectors such as housing, consumer durables and automobiles are expected to benefit from softer borrowing costs,” said Vyas.
Vyas suggests a greater tilt towards equities due to gold’s stellar gains over the last year.
“Over the past year, returns from Nifty 50 and Nifty Midcap 100 have been muted at around 5% and 0% respectively, compared with a sharp 64% rise in Gold. This divergence creates a compelling case to rebalance portfolios with a greater tilt towards equities,” said Vyas.
Given the ongoing US trade war and persistent geopolitical uncertainties, Vyas recommends maintaining some allocation to gold as a hedge.
However, he emphasised that valuations in Indian equities have become more reasonable after the broader market correction, and coupled with the beginning of a falling rate cycle, provide a comfortable entry opportunity to increase equity exposure.
Ritesh Taksali, Chief Investment Officer at Edelweiss Life Insurance, believes that despite ongoing global uncertainties, current market valuations present a constructive backdrop for long-term equity investors.
“The Nifty is trading at nearly 21.7P/E trailing earnings, below its 10-year historical average, indicating that valuations are reasonable. As capex gathers momentum and the government’s recent initiative to support consumption growth, it is expected to translate into broad-based corporate earnings growth over the coming quarters,” said Taksali.
“With valuations still below historical averages and the earnings cycle on an upward trajectory, the current market setup provides investors with an attractive opportunity to accumulate quality equities with a long-term perspective,” Taksali said.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
