How to approach stocks after rate cuts – Views on news from Equitymaster

December 17, 2025

The US Federal Reserve’s Open Market Committee, at its December 2025 meeting, cut the Fed Funds rate by 25 basis points (bps), which now stands at 3.5-3.75%, as expected.

This decision was made as job growth slowed and unemployment rose.

The Federal Reserve also noted that while U.S. economic activity has grown at a moderate pace, uncertainty about the economic outlook remains high.

This is the third time in a row that the US Fed has cut interest rates this year, despite an increase in inflation compared to earlier this year. Between September and December, the Fed Funds rate was cut by 75 basis points.

Federal Funds Rate Actions by the US Fed

Data as of December 2025
Source: FOMC statementsAt the December meeting, nine of the 12 members (including Fed chief Jerome Powell) voted in favor of this monetary policy action, while Dr. Stephen Miran – who also chaired the Council of Economic Advisers under President Donald Trump – voted against it and believed that rates should be cut by 50 basis points at this meeting. The other two members favored no change in the federal funds rate at the December meeting.

The FOMC said it would carefully assess incoming data on labor market conditions, inflation pressures and expectations, financial and international developments, and their prospects for the balance of risks.

It made clear its commitment to supporting maximum employment and reducing inflation to 2%.

To give a hint about the path to interest rates, here’s what Fed chief Jerome Powell said in his speech:

• “I don’t think a rate hike is anyone’s baseline because the following is anyone’s baseline right now. I’m not hearing that. What you’re seeing is some people think we should stop here and we’re in the right place and we should just wait. Some people feel like we need to make some more cuts this year and next year. But when people write down their assessments of policy about where it should go, it’s going to stay here, either cut a little or cut more than a little.”

It looks like the Fed will cut rates by just 25 basis points in 2026.

Back in India, the RBI’s six-member Monetary Policy Committee (MPC) voted unanimously in favor of a 25 basis point rate cut at its meeting earlier this month, between December 3 and 5, taking the policy repo rate to 5.25%.

The MPC also decided to continue with the neutral monetary policy.

These decisions were made on the basis of lower headline CPI inflation and the expectation that it is likely to be softer than previous projections, mainly due to favorable food prices. Even low core inflation, which excludes food and fuel, encouraged the RBI.

The RBI expected India’s real GDP growth to weaken somewhat, mainly due to external uncertainties. The favorable inflation outlook for both headline and core rates continues to provide policy space to support growth momentum.

One member of the MPC, Prof. Ram Singh, also voted in favor of changing the policy position from neutral to accommodative at the December meeting.

How have the stock markets reacted?

The rate cuts are a good sign for the stock markets, especially the Fed.

This is expected to ease liquidity and encourage foreign investors to invest in Indian equities, especially when it is seen as a bright spot with the various reforms implemented in recent years. Positive FPI flows, in turn, may also help stem the recent depreciation of the Indian rupee to some extent.

The rate cut is expected to benefit interest rate sensitive sectors such as automotive, consumer durables, real estate, capital goods and banking and financial services.

How to approach your stock portfolio now

It is important to keep return expectations rational and not get carried away, as interest rate cuts are in line with expectations.

We must also be vigilant about profits, which are ultimately the driving force behind equities.

Favor companies with strong balance sheets, competent management, low debt, wise use of capital, that are on the growth path and generate decent returns on equity.

Ideally, you should now prefer a large-cap focused portfolio as markets are trading near all-time highs. Largecaps should be part of your core portfolio (a larger portion), while the smallcaps and midcaps can be kept in the satellite portfolio (a small portion), depending on your risk profile.

While the price-to-earnings ratio in terms of valuation is at the five-year average, indicating a reasonable price level, the fact is that the Indian stock market commands a premium compared to global peers.

The price gain of the Morgan Stanley Capital International (MSCI) India Index currently stands at 27, higher than the price gain of the MSCI Emerging Markets Index and the MSCI World Index, which are around 17 and 24 respectively.

Even on a twelve-month price-to-earnings basis, the MSCI India Index, with a price-to-earnings ratio of almost 23, is higher than the other emerging markets and the rest of the world, which are around 13 and 20 respectively.

India’s current market capitalization to GDP ratio

The market capitalization to GDP ratio measures the total stock market capitalization compared to the monetary value of the goods and services produced by the economy. It’s called the Buffett Indicator (named after legendary investor Warren Buffett).

This ratio for India is in the ‘significantly overvalued’ zone.

When you consider this, there is a risk involved. Any geopolitical and global macroeconomic uncertainty could push the stock market lower.

Therefore, you must consider the risks involved.

• “The essence of investment management is managing risk, not managing returns.” -Benjamin Graham

When considering stocks, it makes sense to spread investments into lump sums, or better yet, go the SIP route if you have financial goals.

Be careful and be a thoughtful investor.

Have fun investing.

Disclaimer: This article is for informational purposes only. It is not a recommendation and should not be treated as such.