The US Federal Reserve is set to announce policy verdict later today, Wednesday, 16 September with markets bracing for a fresh rate hike as inflation, bond yields and oil prices continue to climb. The decision comes at a sensitive juncture for global markets, with rising inflation, treasury yields and oil prices having strengthened the case for tighter monetary policy, while the escalating Middle East conflict has added another layer of uncertainty.
For Indian markets, the implications extend beyond equities, with the rupee, foreign flows, bond yields and gold also potentially responding to the Fed’s decision and its guidance on what comes next.
The Federal Reserve is scheduled to announce its policy decision later today after concluding a two-day meeting. Traders are heavily pricing in a 25-basis-point rate increase, which would take the benchmark rate to 3.75%-4.00%, with policymakers expected to signal the possibility of further tightening.
The change in expectations has been particularly sharp. Barely two weeks ago, the CME FedWatch tool showed a 60% probability of a rate cut. That has since flipped, with traders now pricing in a 92.5% probability of a Fed rate increase. If delivered, the move would mark the first rate hike in more than three years.
Investors are also expected to focus on Fed Chair Kevin Warsh’s post-decision remarks for clues on the inflation outlook and the likely path of rates.
According to Reuters, Morgan Stanley expects another quarter-point rate increase in December. The forecast came after recent US inflation data was stronger than expected. The brokerage now expects two Fed rate hikes this year and believes the central bank could signal further tightening before eventually pausing as inflationary pressures ease.
What does it mean for Indian stocks?
The US rate decision comes at a sensitive time for Indian markets. A rise in US Treasury yields above 5% could make emerging markets such as India less attractive to foreign institutional investors (FIIs), which have already sold more than ₹14,400 crore worth of Indian stocks over the past two weeks.
The immediate rate hike itself may not come as a surprise to markets, according to V K Vijayakumar, Chief Investment Strategist at Geojit Investments, who said the bigger focus would be on the Fed’s assessment of the economic outlook and its future policy direction.
“In today’s meeting, the Fed is most likely to raise interest rates by 25 bp. However, this is unlikely to impact the market since it is already discounted by the market. More market-moving will be the Fed commentary,” V K Vijayakumar, Chief Investment Strategist at Geojit Investments, said.
A Fed hike could strengthen the dollar, put pressure on the rupee, push bond yields higher and contribute to near-term volatility in Indian equities. However, much of the move may already have been factored into market prices, putting greater emphasis on the Fed’s forward guidance.
Investors will therefore be watching whether the rate increase is presented as a one-off response to inflationary pressures or the beginning of a more sustained tightening cycle.
Will RBI also raise rates?
Meanwhile, Axis Capital said the RBI was likely to remain on hold in October despite upside risks to inflation, with a rate hike currently expected in December. However, it noted that a US Fed hike could force the RBI to act earlier in October.
Axis Capital also said the Fed decision had emerged as a key trigger, with markets assigning a 92% probability to a Fed hike at the time of its report, although the brokerage did not consider a hike its base case. It added that a Fed move could increase pressure on the RBI to tighten policy.
The brokerage further noted that fiscal support could strengthen the case for tightening. While tightening during an adverse energy shock can hurt growth, it may become necessary if temporary price shocks turn into persistent, broad-based inflation, particularly when fiscal policy is cushioning the impact.
Going ahead, market direction is likely to remain sensitive to the Federal Reserve’s policy communication and meeting minutes, with a hawkish stance potentially keeping pressure on equities through higher yields and a stronger dollar, while a dovish tone could support risk sentiment and encourage further upside.
Fed rate decision: What it means for gold
Gold and silver bounced back on Wednesday, with MCX gold at ₹1,51,850 per 10 grams, up ₹1,040, and MCX silver at ₹2,35,421 per kg, up ₹3,303, as bargain hunting and short covering set in after a three-week selloff in both metals.
The selloff was driven by last week’s hotter-than-expected US inflation data — headline CPI rose 0.4% month-on-month and held at 3.4% annually — which all but sealed the case for the Federal Reserve to raise rates by 25 basis points at today’s meeting, with the CME FedWatch tool pricing the move at around 90-93% probability.
“Higher inflation typically pushes central banks toward tighter policy, and the resulting rise in US Treasury yields to near 5% has been the key headwind for non-yielding metals like gold and silver over the past three weeks,” Ashish Rajodiya, Head – Commodities, PL Capital, said.
Gold now has support at ₹1,49,500 and ₹1,46,000, with resistance at ₹1,54,500 and ₹1,57,000.
Silver now holds as immediate support, followed by ₹2,23,000, while resistance is placed at ₹2,40,000 and ₹2,45,000.
“With the rate hike itself largely priced in, the market’s attention now shifts to the Fed’s tone on future policy. If today’s statement signals more hikes ahead to keep tackling inflation, these support levels could be tested again,” Ashish Rajodiya, Head – Commodities, PL Capital, said.
A more cautious tone on the pace of further tightening could extend today’s recovery.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
