The US Federal Reserve rate cut on Wednesday, the 13th after May 16, 2000 may prove to be a boon to Indian depositary receipts.

More than a beneficial impact on domestic shares, a Fed rate cut has almost always positively impacted the DR market in the past.

In a quick study, Instanex Capital has tracked the movement of major components of the Instanex Skindia DR Index in the period one week prior to and one week after the Fed cut rates in the last two years.

The study shows that Indian depositary receipts have generally reacted positively to a Fed rate cut with the ISDI gaining 4.14 per cent on an average in six of the 10 cases and losing 1.29 per cent on an average in the remaining four cases.

The market expects a 50 basis points cut tonight. If the Fed meet the market expectations, then the Indian DRs should get a booster dose.

In the past 12 rate cuts, the ISDI has gained 4.58 per cent on an average in six out of seven cases when the Fed has cut rates by an aggressive 50 basis points and losing barely 0.45 per cent in one case.

Indian DRs reacted negatively to a rate cut of 25 basis points with the ISDI gaining 1.46 per cent in one of three cases and losing 3.09 per cent on an average in the other two cases.

According to Gautam Chand, CEO of Instanex Capital, the expected US Fed rate cut will be positive for Indian DRs.

"Our view is that the expected US Fed rate cut will lead to rates being at their lowest level since the 1950s. This will also create a unique situation where the $1 trillion money market will have no room to earn profits since the fund managers' fees will be almost as high as the fund's return," he said.

The search for investment avenues for this money will add momentum to the rally in Indian DRs, mainly in liquid counters like ICICI Bank and Reliance.

The charm of the DR markets lies in the fact that it is open and accessible to all investors in the US unlike the domestic equity markets, which is available only for registered foreign institutional investors.

As analysts said, the DR market is almost like a small window of opportunity for USD investors seeking to diversify their risks to the local markets or even seeking aggressive returns from emerging markets.

To that extent, the Indian DR market represents a well balanced basket of technology, hi-tech pharma and bank stocks.

"A US Fed rate cut will push the federal discount rate to the levels of one per cent or lower, which will surely force the huge US pension fund (401K plan) industry to look aggressively for stocks that are either counter cyclical to the US markets or at least moderately insulated from the swings of the US markets," analysts said.

This will mean a swing in global portfolio flows to the emerging markets, but the biggest beneficiary will be countries which enjoy a "respectable brand recognition" in the US investors' minds.

Many investors will not go through the hassles of Sebi registration and therefore, may seek the safety of the DR markets where they are assured of transparency and Securities and Exchange Commission oversight over these listings, they added.