After Monday's rebound, indices brace for Fed verdict and oil cues

After a sharp recovery on Monday, the markets are poised to start Tuesday on a steady footing as investors weigh a favourable mix of domestic macro data, easing commodity prices, and global central bank signals. While geopolitical overhangs persist, the near-term narrative has shifted back to fundamentals—cooling inflation, accommodative cues from the Fed, and selective sectoral tailwinds.

On Monday, benchmark indices posted strong gains, with the Nifty50 rising 0.92% to close at 24,947 and the Sensex gaining over 600 points to 81,796. The rebound came after two sessions of selling, supported by a bounce in U.S. equity futures and stabilising oil prices. Broader markets participated as well, with Nifty Midcap100 and Smallcap100 gaining close to 1%. The Nifty continues to trade within a broad band of 24,400–25,200.

As the U.S. Federal Reserve begins its two-day policy meeting, global markets are holding steady, anticipating no change in rates. With the Fed funds rate unchanged since December at 4.25%-4.50%, officials have maintained their projection of two 25-basis-point cuts in 2025. However, concerns around inflationary risks from new tariffs have kept policymakers cautious thus far. Now, with easing retail demand and commodity prices, market participants see a 57.1% probability of the first cut arriving in September, according to CME’s FedWatch.

Closer home, May WPI fell sharply to 0.39%, the lowest in over a year, helped by deflation in fuel and power categories and softness in primary goods. With CPI inflation already well within the RBI’s comfort zone and food price outlook improving due to healthy reservoir levels and lower duties on edible oils, the macro backdrop remains supportive with the 50-bps cut in repo rate.

Commodity markets, however, are volatile as geopolitical tensions persist. Brent crude briefly fell below $74 before rebounding, even as Israel struck Iranian oil and gas infrastructure. While prices have risen 16% since end-May, Monday’s intraday weakness helped Indian oil marketing companies rally on hopes of lower input costs.

While the monsoon arrived early, it has since slowed, leading to a 31% cumulative rainfall deficit. However, it remains early in the season, and market participants are hopeful of a pickup in activity over the coming weeks.

According to analysts, sectors linked to rural demand—such as agrochemicals, fertilisers, and rural FMCG—remain on investors’ radar, particularly as softening inflation and improving liquidity conditions provide a tailwind for consumption recovery in non-urban pockets.

While headline indices may continue to consolidate in the short term, underlying sentiment will depend on improving macros, dovish policy expectations, and foreign inflows.