How could Indian markets react if Fed goes for rate hike tonight? Check what analysts say

The US Federal Reserve is expected to raise its interest rate on Wednesday, its first hike since July 2023, with a majority of economists polled by Reuters also expecting at least one more increase by the end of March.

A US Fed rate hike could strengthen the dollar, put pressure on the Indian rupee, push up bond yields and trigger near-term volatility in equities.

What matters more is the Fed’s forward guidance as the rate hike is already priced in, noted Ponmudi R, Founder and CEO, Enrich Money.

He said Indian markets can absorb a rate hike, but uncertainty over how far the Fed is prepared to go could be harder for markets to absorb.

“A 25-bps hike by itself may not be the biggest concern, as a significant part of the move is already being priced in. For Indian markets, the real message will come from the Fed’s forward guidance and the direction of US Treasury yields after the announcement,” Ponmudi said.

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“If the Fed indicates that inflation risks remain elevated and further tightening is possible, higher US yields and a stronger dollar could keep global capital in risk-off mode. For India, that could translate into continued FII pressure, rupee weakness and valuation compression, particularly in high-beta and rate-sensitive sectors,” he added.

India’s domestic growth story remains relatively resilient, but global liquidity continues to matter. With crude oil prices elevated and the rupee already under pressure, a sustained rise in US yields could create an additional external headwind.

On the other hand, if the Fed hikes rates but signals that future decisions will remain data-dependent, markets could interpret it as a hike with a pause possibility. This could help stabilise global risk sentiment and potentially trigger some short-covering in Indian equities, said Ponmudi R.

“From a market perspective, 23,000 is an important psychological and technical zone for the Nifty. Holding this level could create room for a recovery towards 23,200-23,400, while a sustained break below 23,000 could trigger another leg of risk-off selling, he noted.

A run of strong economic data following Fed Chair Kevin Warsh’s Jackson Hole speech, which was widely perceived as hawkish, has added to expectations of tighter policy.

There are also concerns that a no-hike decision this week could send bond yields sharply higher.

The 10-year US Treasury yield is already holding near the 5 percent threshold. A sustained rise in US yields could put pressure on Indian markets as higher US bond yields can strengthen the dollar and weigh on flows towards riskier emerging markets such as India.

“A sustained rise in global yields and oil prices could also complicate the domestic monetary policy outlook,” said Sunny Trisal, Portfolio Manager, Investvalue Capital.”

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