The two-day Federal Open Market Committee (FOMC) meeting began on Tuesday, with policymakers navigating a complex backdrop of elevated inflation risks due to rising crude prices and signs of slowing growth.
The Iran conflict has added a fresh layer of uncertainty to global markets. Oil prices have surged since the escalation, raising concerns about imported inflation across economies, including India. While central banks typically look through short-term commodity shocks, the persistence of the conflict will be key in shaping future policy direction.
Recent data from the US has shown mixed signals, with inflation still above the Federal Reserve’s comfort zone, while growth and labour market indicators have softened. This has led to a shift in rate expectations, with markets now pricing in a more delayed and limited rate-cut cycle compared to earlier projections.
For Indian markets, the Fed’s commentary will be more important than the rate decision itself.
“Street is pencilling no change in interest rate by US Fed and hence this event is likely to be neutral from equity market perspective. Commentary on inflation and jobs data will be the key monitorables,” said Sunny Agrawal, Head – Fundamental Research at SBI Securities.
Nifty and Sensex have shown resilience in the past two sessions, supported by easing crude prices and strength in IT stocks. However, the direction of global liquidity and currency movements remains closely tied to US monetary policy signals. Also Read | Flexi cap mutual funds record highest inflows for 7 consecutive months. Will the trend continue?
If the Fed signals a prolonged pause or delays rate cuts further, analysts say it could keep global yields elevated, which may lead to intermittent foreign institutional investor (FII) outflows from emerging markets like India. On the other hand, any indication of policy easing later in the year could support risk sentiment and improve capital flows.
“At this point of time, we are of the view that the FOMC will maintain a status quo on the rates, i.e., the rates would be kept unchanged at the range of 3.50%-3.75%. In fact, one of the major US-based market exchanges operator indicates that the probability of Fed maintaining the same rate is as high as 99.1% and only 0.9% probability remains for a 25-bps rate cut,” said Ajit Banerjee, President and Chief Investment Officer at Shriram Life Insurance.
The trajectory of crude oil remains another critical variable. Higher oil prices tend to widen India’s current account deficit and put pressure on inflation, limiting the Reserve Bank of India’s policy flexibility.
Investors will also be watching whether the Fed acknowledges the inflationary impact of the Iran conflict or treats it as a temporary supply-side shock. This distinction could influence how quickly global monetary conditions ease.
In the near term, Indian equities may remain driven by a combination of global cues and domestic factors, including earnings visibility and sectoral trends. IT stocks, in particular, are likely to remain sensitive to the Fed’s guidance, given their exposure to US demand.
