Indian stock market impact: What rising September Fed rate hike bets mean

The US Fed Chairmain Kevin Warsh-led FOMC kept the US interest rate unchanged at 3.5–3.75 per cent overnight. While this was largely in line with expectations, bets for a September rate hike has increased. Analysts were quick to point out that Thursday's was a 9-3 split decision with three FOMC members namely Beth Hammack, Neel Kashkari, and Lorie Logan voting for a rate hike to control inflation.

This split decision indicates that a rate hike may come soon, warned VK Vijayakumar, Chief Investment Strategist at Geojit Investments. The development  sent US bond yields and US stocks tumbling overnight.

While Asian markets, including India, chose to ignore the development, analysts said US bond yields and the dollar index are something investors should be tracking closely. At last count, the US-10 year yields stood at 4.7 per cent.

Ankita Pathak, Head – Global Investments, Ionic Asset noted that the new Fed Chair has actively refrained from providing forward guidance and instead expects the markets to provide signals of the evolving macroeconomic situation.The differing views within the Committee highlight the uncertainty around the inflation outlook, reinforcing the Fed's data-dependent approach in the coming months, he said.

"If Fed decides to tighten policy going forward, it could support the US dollar and weigh on commodities and emerging market assets," Pathak said.

Rajesh Palviya, Head of Research at Axis Direct said the immediate impact on Indian market is likely to be sentiment-driven rather than structural as elevated US yields could keep foreign portfolio flows volatile. Sectors with premium valuations may witness intermittent profit-taking," he said.

Data showed FPI net flows into India turned positive at Rs 9,613 crore in July after four months of persistent selling. That positive trend could be at risk. Palviya, however, feels that India's strong domestic macro fundamentals, resilient earnings outlook and healthy liquidity should help cushion the impact a bit.

JM Financial said the Fed’s hawkish commentary mated with inaction dented its credibility. "Markets are now factoring in 57 per cent chance of a rate hike in September. We believe that a rate hike will be pushed to December 2026; until then, we think policy tightening should be carried out through the liquidity route," the brokerage said.

Palviya advised investors to closely monitor US bond yields, dollar movement and crude oil prices, which together will determine the near-term direction of Indian equities.

David Kohl, Chief Economist, Afonso Borges, Fixed Income Research at Julius Baer said it is not surprising that markets continue to price roughly two rate hikes over the next year.

But "we disagree with that interpretation. Warsh’s tone on inflation remains hawkish, but he is deliberately non-committal on the policy path. Accordingly, we see scope for Treasury yields to move lower as those expectations are gradually unwound."

Meanwhile, Ajit Banerjee, President and Chief Investment Officer at Shriram Life Insurance said: "In view of the Fed staying put with the existing rates in this meeting, perhaps it will give RBI’s MPC some additional breathing time to not prepone its rate hike decision in the forthcoming meeting to maintain the interest rate differential quotient."