Global investors are gaining the advantage as the US Federal Open Market Committee (FOMC) launches its two-day policy meeting today, with a decision on interest rates expected on June 18th. The US Federal Reserve is widely expected to not change interest rates, but the market closely tracks the Fed’s guidance amid uncertainty about US tariff policies and their potential drag.
Recent inflation data has provided some easing. May’s US Headline Consumer Price Index (CPI) rose 0.1% per month and 2.4% year-on-year, while Core CPI rose 0.1% and 2.8% respectively.
However, in India, where markets have historically been highly sensitive to US monetary policy, the Fed continues to be a key volatility trigger.
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Why is it important for Indian investors?
Future rate hiking tips can surprise foreign portfolio investors (FPIs) who play a dominant role in Indian equity landscape. A significant portion of these flows comes through the “carry trade.” It borrows in a low interest market and invests in India’s higher earning assets. As a result, tightening by the Fed narrows this profit margin and reduces the appeal of the Indian market.
Four-way hits from Fed hikes
1) Capital Outflow – High US interest rates lead to investors returning to American assets, causing FPI outflows from India.
2) Stronger Dollar – Rate hikes increase dollars, weaken rupees, and further erode FPI returns.
3) Rising borrowing costs – Interest costs increase both globally and domestically, affecting the profitability and credit demand of a company.
4) Increased market volatility – Short-term investors often withdraw emerging markets and cause sharp swings in the index.
RBI’s defensive play
To offset potential outflows, the Reserve Bank of India is steadily building its foreign exchange reserves. You also have flexibility in determining fees if there is room for reduction in the case of volatility spikes. Central banks closely reflect FRED signals to maintain policy stability without compromising growth.
When the Fed cuts fees
Dovish Fed, on the other hand, usually serves as a tailwind for Indian stocks. A proper case: In October 2019, after the Fed’s third cut this year, Sensex surged to record highs the following day. Lowering the US rate makes Indian assets more attractive to global investors, especially when domestic inflation is controlled.
High warning market
The Fed expects to hold interest rates, but perhaps by tweaking that tone, Indian market participants will hear a lot. Signs of softness in the Fed’s outlook could ease emotions, but Hawkish’s signals could rekindle volatility across fairness, currency and bond markets.
With the FOMC decision on the second half of June 18, Indian traders are set a week ahead of potentially turbulent flows. This can once again prove how much Wall Street affects Dalal Street.
