Stock Market Crash: Why Did Nifty and Sensex Tank Despite Fed’s Rate Cut?

The Federal Reserve concluded its final policy meeting of 2024 by cutting the federal funds rate by 25 basis points, lowering the target range to 4.25% to 4.5%.

This marked the third consecutive rate cut after similar moves in November and September. Despite these dovish adjustments, the Fed’s revised economic projections signalled caution.

The central bank now anticipates only two rate cuts in 2025, compared to the four forecasted in September. Inflation, though moderating, remains elevated, with the Fed projecting a higher-than-expected rate trajectory for 2025 and beyond.

“The major reason for the market falling was that the Fed changed its projections for 2025 and 2026. Inflation trajectory was raised. The number of rate cuts in 2025 were forecasted at 2 versus the 4 forecasted in September’s meeting. As per the Fed’s Dot Plot, now 4 rate cuts will probably happen by 2026 end. On the basis of this, stocks went down, bond yields went up, and the US dollar appreciated versus both developed country currencies as well as those of emerging markets. This led to a bout of ‘risk off’ sentiment, with Gold, Silver as well as Bitcoin and other cryptocurrencies also going down,” said Ajay Bagga, Executive Chairman, OPC Asset Solutions.

Fed Chair Jerome Powell emphasized the importance of flexibility and incoming data in shaping future policy. “The Committee will carefully assess the evolving outlook and the balance of risks,” he noted during the post-meeting press conference. The rate cut was accompanied by adjustments to the interest rate on reserve balances, now at 4.4%, and the primary credit rate, reduced to 4.5%.

Indian Markets Reel from Global Sentiment
The Sensex sank 964 points on Thursday, closing at 79,218.05, while the Nifty shed 247 points to settle at 23,951.70. This marked the third consecutive day of losses, with broader indices like Nifty Midcap 100 and Nifty Smallcap 100 also posting significant declines. Bajaj Finserv, JSW Steel, and Reliance were among the top laggards, while defensives like Sun Pharma and Power Grid managed to stay in the green.

Over the past week, Indian markets have witnessed heightened volatility. On Wednesday, the Sensex fell by 502 points, and Tuesday saw a massive 1,000-point drop amid uncertainty surrounding the Fed’s policy decision. Broader markets fared no better, with the Nifty Next 50 and Nifty Microcap 250 indices also plunging.

Sugandha Sachdeva, Founder-SS WealthStreet explained, “The sharp correction reflects a mix of weak global cues and macroeconomic headwinds, including FII outflows, rupee depreciation, and India’s widening trade deficit. Key support levels on the Nifty could attract buying interest, but sentiment remains cautious.”

‘Indian markets are seeing conflicting trends with IPOs attracting huge oversubscriptions and listing gains while secondary markets are seeing FPI outflows . A stronger US Dollar means bad news for FPI inflows to EMs including India . With Fed cuts pushed further ahead , the return of strong inflows into India also get impacted,’ said Bagga.

FII Outflows and Dollar Strength Worsen Pain
Foreign Institutional Investors (FIIs) sold Indian equities worth over Rs 8,000 crore this week, reversing December’s buying trend. The dollar index hit a two-year high amid global risk aversion, pushing the rupee to an all-time low of 85.12 against the greenback. Rising U.S. Treasury yields compounded the pressure, making emerging markets like India less attractive.

‘FIIs have offloaded Indian equities worth Rs.8,000 crore this week, reversing their buying trend in December. India's trade deficit widened to a record $37.84 billion in November, while the rupee fell to an all-time low of 85.12 against the dollar, further unsettling investor sentiment,’ Sachdeva added.

“The firmer dollar and higher U.S. yields don’t bode well for risk assets,” noted Garima Kapoor, Chief Economist, Elara Capital. “ Indian markets are correcting following the sharp correction in US markets as quantum of rate cuts are getting priced in on the lower side. The firmer US Dollar and higher US yields don't don't bode well for the risk assets in general.”
The widening trade deficit, which hit a record $37.84 billion in November, further added to domestic concerns. With imports surging and exports faltering, the macroeconomic backdrop appears increasingly challenging.

Key Levels and Investor Strategies
Amid heightened volatility, the Nifty’s 23,900–23,820 zone is emerging as a crucial support level. “If breached, the index could face extended downside. Immediate resistance lies at 24,380, which must be reclaimed for any meaningful recovery,” said Sachdeva.

Experts recommend a defensive investment approach. “Focus on quality stocks in sectors like healthcare and utilities while closely monitoring global cues, including upcoming US GDP data and the Bank of England’s policy decision,” she added.

Global Trends Amplify Domestic Woes
The ripple effects of the Fed’s decision extended beyond equity markets. Gold and silver prices retreated, while cryptocurrencies like Bitcoin saw significant corrections. In Asia, indices opened lower, reflecting risk-off sentiment. European markets followed suit, deepening the global selloff.

The market’s reaction also reflects skepticism about the Fed’s communication strategy. “If the Fed could clarify which data points it looks at and at what levels it would cut rates, market volatility and fear would reduce substantially,” Bagga noted.

What Lies Ahead?
The Fed’s decision to temper its rate-cut pace reflects resilience in the U.S. economy but raises questions about inflation’s stickiness. Domestically, persistent macro challenges and global uncertainty will likely keep Indian markets under pressure in the near term.