US Fed & RBI Rate Cuts: How Should You Reshape Your Investment Strategy for Gold and Equities?

With both the US Federal Reserve and the Reserve Bank of India cutting interest rates, the investment environment is entering a new phase. Lower rates typically boost market sentiment, but the current scenario requires investors to think strategically—especially when it comes to equities and gold.

What Has Happened?

• On 5 December, the RBI reduced the repo rate by 25 basis points, bringing it down to 5.25%. It also upgraded GDP forecasts and lowered inflation expectations.

• On 10 December, the US Federal Reserve cut its benchmark rate for the third straight time, lowering it to 3.50%–3.75%, the lowest since 2022.

Rate cuts generally help markets by reducing borrowing costs and improving liquidity. However, despite the supportive environment, Indian markets reacted cautiously.

• Sensex gained 0.52% immediately after the RBI cut but dropped for three consecutive sessions afterward.

• Following the US Fed cut, the index dipped 0.30% in early trade but later recovered to end 0.51% higher.

Why Is the Market Still Volatile?

Experts say the market had already priced in the rate cuts. At the same time, two major challenges are creating uncertainty:

1. Delays in the India–US trade deal

2. Persistent selling by FIIs

Sudeep Shah of SBI Securities explains that despite positive triggers, several macro issues continue to overshadow the outlook.

• A strong US dollar is discouraging FIIs.

• The Fed’s message that inflation remains sticky and future rate cuts may be limited has also affected global risk appetite.

• Slow US–India trade progress and the Bank of Japan’s surprise tightening have added to global volatility.

• India’s nominal GDP growth, trending at around 8.7%, is also restricting broad-based earnings upgrades.

---

Is It Time to Change Your Investment Strategy?

Focus on Fundamentals

Rate cuts alone aren’t enough.

• Mid and small-cap valuations remain expensive, requiring strong earnings growth to justify current prices.

• While real GDP growth is strong, very low inflation means it may not translate into strong nominal growth or higher earnings.

• Markets need confidence that positive macro data will convert into sustainable earnings and steady fund inflows.

“A clear uptrend will emerge only when macro headwinds ease and global liquidity, earnings visibility, and risk appetite fall in place,” says Shah.

---

Investment Strategy for Equities and Gold

Equities: Prefer Large-Caps, Be Selective with Mid/Small-Caps

According to Gautam Kalia of Mirae Asset Sharekhan:

• Falling inflation

• A pro-growth RBI

• GST improvements

• Better liquidity

All these support long-term equity investing.

Large-caps should be the core of the portfolio. Selective mid and small-caps can be added for long-term growth.

Naveen Vyas of Anand Rathi adds that rate cuts by both the Fed and RBI make Indian equities more attractive globally:

• Lower borrowing costs help interest-rate–sensitive sectors like housing, autos, and consumer durables.

• With gold delivering exceptional returns in the past year (+64%), he suggests tilting portfolios more towards equities, as Nifty 50 and Midcap 100 have delivered muted returns (5% and 0% respectively).

Even so, he recommends keeping some allocation to gold as a hedge against global uncertainties such as geopolitical risks and trade tensions.

Gold: Continue Holding as a Safe-Haven Hedge

Gold prices have stayed above $4,000 since early December and reacted positively to the Fed’s rate cut.

Kalia advises maintaining exposure to gold and silver because:

• Central banks are diversifying reserves

• Industrial demand is rising

• Geopolitical risks remain elevated

These factors can continue supporting precious metals.

---

Valuations Present an Opportunity

Ritesh Taksali of Edelweiss Life Insurance believes current market valuations are supportive for long-term equity investors:

• The Nifty is trading at 21.7x trailing earnings, below its 10-year average.

• Government-led capex, improving consumption, and stronger corporate earnings are expected to drive the next phase of growth.

With valuations still reasonable and the earnings cycle turning up, Taksali suggests this is a favorable time to accumulate quality equities for the long run.

---

Bottom Line

• Stay invested, but stay selective.

• Prefer large-caps, add high-quality mid/small caps gradually.

• Maintain some allocation to gold to protect against global risks.

• Use the current market volatility and reasonable valuations to build long-term equity positions.