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• Indian shares are near record highs, ahead of U.S. data that may influence interest rate cuts.
• The Nifty 50 index and the S&P BSE Sensex experienced a significant rally, but market sentiment remains cautious.
• U.S. rate cuts could increase foreign fund inflows into emerging markets like India, but the impact depends on the size of the cut and global economic outlook.
• Analysts advise caution, noting that sustained market performance requires a supportive domestic environment and positive corporate earnings.

Indian shares have been hovering near record highs, with the Nifty 50 index and the S&P BSE Sensex experiencing a significant rally. This surge in the Indian stock market comes ahead of a raft of data that may determine how deeply the U.S. will cut interest rates later this month. The Nifty 50 index was largely unchanged at 25,259.3 points, while the S&P BSE Sensex dipped 0.1% to 82,490.79. The blue-chip Nifty 50 gained 4.7% in a thirteen-session rally, its longest ever, until Monday. Both the benchmarks hit lifetime highs in the previous session.

However, Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management, noted that there are not many positive local levers for markets to sustain highs. The focus is now on U.S. economic data, including the U.S. ISM manufacturing survey due later in the day and particularly jobs data on Friday, that could provide cues on the extent of Federal Reserve rate cuts.

The U.S. personal consumption expenditure data last week showed an uptick, raising expectations that the Fed was likely to opt for a smaller rate cut at its September meeting. Markets are fully pricing an at least 25 basis-point rate cut at the September meeting. Expectations for a 50 basis-point reduction, however, fell to 31% from 32% last week.

Sectoral Performance Amid Rate Cut Speculation

Interest rate cuts in the U.S. tend to bring in more foreign fund inflows into emerging markets like India. This is because lower interest rates in the U.S. make emerging markets like India more attractive to investors seeking higher yields. However, the sentiment is cautious as the extent of the impact depends on the size of the rate cut and the overall global economic outlook.

On the day, nine of the 13 major sectoral indexes were trading in the red, though losses were marginal. The pharma index was the biggest sectoral gainer, rising 0.8%, while heavyweight financials and the energy index fell about 0.3% each. Among individual stocks, Hindustan Composites surged 6.8% on a deal to acquire shares in food delivery firm Swiggy. Solar modules maker Premier Energies' shares more than doubled in debut trade.

The broader market outperformed the benchmark indices. While BSE Midcap gained 0.3 percent, BSE Smallcap was up 0.6 percent. The Sensex and Nifty experienced volatile trading in negative territory on September 3, weighed down by losses in the banking and IT sectors. This decline comes after both benchmarks had recorded gains for the past 10 sessions.

Market Analysts' Take on the Anticipated US Rate Cut

Shrey Jain, Founder and CEO of SAS Online, advised investors to exercise caution in stock selection and maintain light carry-forward positions to navigate current uncertainties. The broader market outperformed the benchmark indices. While BSE Midcap gained 0.3 percent, BSE Smallcap was up 0.6 percent. Analysts said that the focus will now be on global market trends amid a lack of any major domestic triggers.

The anticipation of US interest rate cuts generally benefits emerging markets like India, as it could lead to increased foreign fund inflows. However, the sentiment is cautious as the extent of the impact depends on the size of the rate cut and the overall global economic outlook. Analysts also emphasize that while foreign fund inflows are a positive factor, sustained market performance requires a supportive domestic environment and positive corporate earnings.