US Fed keeps rates unchanged; what it means for Indian equity market

The US Federal Reserve’s decision to keep interest rates unchanged at 3.75%-4.00% could offer limited support to Indian equities, as persistent inflation, the possibility of further monetary tightening and elevated crude oil prices continue to cloud the market outlook, according to market experts.

In an overnight development, the Federal Open Market Committee (FOMC) voted 10-2 to maintain the benchmark federal funds rate, with two policymakers favouring a 25-basis-point hike. Although the decision was in line with market expectations, the dissenting votes highlighted a growing divide within the committee over the appropriate policy response to persistent inflation.

In its policy statement, the FOMC said economic activity was expanding at a strong pace, supported by resilient domestic spending, productivity growth and robust capital investment. Job gains had kept pace with the workforce, while the unemployment rate had changed little.

However, the central bank reiterated that inflation remained elevated and emphasised its commitment to returning inflation to its 2% target.

For Indian markets, the Fed’s stance has implications for foreign portfolio investor (FPI) flows, the rupee and equity valuations. The prospect of further US monetary tightening could keep global financial conditions restrictive, potentially limiting foreign capital inflows into emerging markets.

December rate hike in focus

Ankita Pathak, head of global investments at Ionic Asset, said the Fed’s decision to hold rates steady at its second meeting following the September 2026 rate hike reflected a calibrated, data-dependent approach.

“Overall economic growth and labour markets remain sufficiently strong, giving the US Fed time to focus on price stability for now,” she said, adding that a December rate hike appeared likely, in line with the projections in the September policy’s dot plot.

Pathak noted that US inflation remained above target, with the latest consumer price index (CPI) and personal consumption expenditures (PCE) inflation readings at 3.7% and 3.4%, respectively. The September dot plot projected inflation returning to the Fed’s 2% target only in 2029, a year later than previously expected.

She added that US Treasury yields had softened from extremely elevated levels amid renewed safe-haven demand. Markets will now monitor policy decisions from the European Central Bank and the Bank of Japan, alongside potential volatility ahead of the US midterm elections on November 3.

Pathak also noted that India could maintain a tighter monetary policy stance to curb inflationary pressures and rupee depreciation.

Foreign flows, bond yields in focus

Hariselvan Radhakrishnan, founder and CEO of HST Wealth, a SEBI-registered research analyst firm, said the Fed’s decision had not materially eased global financial conditions.

He pointed to the US 10-year Treasury yield, which was around 5.02% in his assessment, saying elevated yields could allow dollar assets to continue competing with emerging markets for capital. This could constrain foreign inflows into Indian equities if yields remain high.

Thomas Priju, portfolio manager at Karma Capital, said the Fed’s pause should not be interpreted as the end of the tightening cycle. Another rate increase could keep US bond yields and the dollar elevated, increasing volatility in Indian equities. High-valuation stocks and segments more dependent on foreign portfolio flows could be particularly vulnerable to changes in global liquidity.

The Fed chair also indicated that, while overall financial conditions had tightened, he was unwilling to characterise them as tight, underscoring the committee’s continued focus on inflation.

Crude oil adds to market pressure

Elevated crude oil prices remain another headwind for Indian equities. Brent crude was trading near $114.50 a barrel, while WTI crude was around $102, according to market commentary provided by analysts.

Sustained high oil prices could increase India’s import bill, pressure the rupee and raise costs for oil-sensitive sectors.

Ponmudi R, CEO of Enrich Money, expects Indian markets to remain range-bound and volatile amid global monetary policy uncertainty and geopolitical risks. He said elevated crude prices and limited progress towards diplomatic de-escalation could restrict the scope for a sustained market recovery.

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