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Triggers in place for portfolio allocation shift from US bonds to EM equities

ICICIdirect Research 19 Sep 2025 DISCLAIMER

The FOMC delivered a 25bps rate cut in its recent meeting. The ‘dot-plot’ indicate a cumulative 75bps cut in 2025, 25bps cut in 2026 and 25bps cut in 2027. A cumulative 125bps rate cut is the current expectation. U.S. 10-year bond yield has fallen by almost 20bps in last 3 weeks, 60bps in last 4 months and 80bps since January this year to ~4.0%.
The velocity of FPI selling has reduced significantly in the month of September. In the first fortnight of September, FPIs have sold just ~2k crores as against ~20k crores last month during the same timeframe. (Foreign investors who have sold Indian equities worth more than Rs 2.4 lakh crore in last 1 year since October 2024).
The 80bps decline in bond yields makes bond market in U.S. less attractive. Assuming the terminal rate in US at 3.25% (4.5% minus 1.25%), bond yields may not fall much from current 4.0% levels and accordingly there is less scope for capital gains. (US 10-year yield at most can fall another 25bps, resulting into 50bps spread over Fed Fund rate of 3.25%). Therefore, some portfolio allocation shifts from U.S. debt to Emerging market equites is a likely scenario, and India may be a beneficiary.
Nifty 50 index is down 8% from the top in USD terms aided by fall in INR while most US indices have turned expensive after making new fresh highs almost on a daily basis.

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