Indian equity benchmarks, Sensex and Nifty, have rallied up to 3.7% in the first half of September, fuelled by a mix of domestic and global factors. GST rationalisation measures, S&P’s credit rating upgrade, and renewed optimism around India-U.S. trade talks have lifted investor sentiment. Adding to this, expectations that the U.S. Federal Reserve would announce its first rate cut in ten months on September 17 also injected positivity into equity markets globally.

Anticipation of the rate cut helped the BSE Sensex soar 2,884 points in just 13 sessions this month, reclaiming the 82,694 mark, while the NSE Nifty50 added 903 points to reach the 25,330 level. The sustained rally has made investors richer by over ₹20 lakh crore in less than two weeks, as the market capitalisation of BSE-listed companies rose to ₹464.79 lakh crore from ₹444.17 lakh crore at the end of August.

Fed cuts rates by 25 bps

In line with Street expectations, the Fed has slashed rates by 25 basis points to 4%–4.25%, its first move since December 2024. The central bank also signaled that two more cuts are possible before the end of the year amid concerns over the U.S. labor market.

“Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated,” the Federal Open Market Committee (FOMC) said in a statement.

The FOMC reiterated its aim of achieving maximum employment and inflation at 2% over the longer run.

“Whilst the rate cut was expected, it is of more note to listen to what Fed Chair Jerome Powell said in the press conference afterwards, where he mentioned that policy decisions remain challenging, and the committee members are still split on further rate cuts, with 10 out of 19 policymakers seeing two or more rate cuts this year,” said Ross Maxwell, Global Strategy Lead at VT Markets.

Maxwell added that financial markets are likely to welcome the rate cut in the near term, as lower borrowing costs ease pressure on households and businesses. “Equity markets may see short-term support, though bond yields could remain volatile as investors weigh growth concerns against inflation risks.”

Will the rate cut spark a rally?

According to market experts, the rate cut could boost capital flows into India, as lower U.S. rates diminish the dollar’s appeal and encourage investors to seek higher returns elsewhere.

“Export-driven sectors, particularly IT companies, are likely to benefit significantly, as easier U.S. monetary policy will support capex of companies in North America, which in turn will aid Indian IT firms’ profitability,” said Vaibhav Vidwani, Research Analyst at Bonanza.

He added that while the policy easing provides stability and confidence, it is not seen as a major game-changer likely to spur significant foreign institutional investor (FII) inflows or a sharp market rally.

Foreign portfolio investors (FPIs) are, however, expected to gradually increase equity and debt allocations to India, attracted by higher yields and strong GDP growth. “India’s robust economic fundamentals position it as a compelling investment destination, offering stable opportunities for global capital amid shifting monetary conditions,” Vidwani said.

Ponmudi R, CEO of Enrich Money, said that a softer dollar also improves the prospects of stronger FII inflows into India. “Coupled with consistent DII support and stable technical underpinnings, this development strengthens the case for continued market upside — so long as global cues remain favorable.”

FIIs remain cautious, having offloaded ₹11,330.08 crore in the cash market month-to-date. However, their strategic additions in index futures (₹4,727.78 crore) and options (₹6,739.97 crore) reflect hedging activity rather than outright bearishness. Counterbalancing this, DIIs have infused ₹32,892.91 crore, supported by resilient retail SIP flows and confidence in India’s long-term growth story.

“This steady domestic support has anchored sentiment and offset external nervousness,” the Enrich Money CEO added.