US Fed: Rates on hold, inflation, policy uncertainty mount; what it means for Indian investors | Stock Market News

After a two-day Federal Open Market Committee (FOMC) meeting, the US Federal Reserve announced on January 29 that interest rates would remain unchanged at 4.25-4.50 per cent at this juncture. The US Fed chair Jerome Powell-led rate-setting panel last cut rates for three straight meetings starting September 2024 for the first time in four years.

As Mint reported earlier, Powell said in the post-policy press conference that the central bank does not need to be in a hurry to adjust the policy stance. He underscored that the rate pause is to see further progress on inflation. FOMC stated that labour market conditions remain solid, and inflation remains ‘somewhat elevated’.

The US Federal Reserve’s decision to pause rate hikes could potentially cause a shift in the global economy, with inflation likely to stay high.

Amid US President Donald Trump’s call to “Make in America”, costs for US companies will rise due to elevated rates, affecting global trade. Experts believe this may create short-term uncertainty for investors. However, the long-term outlook remains positive as the US economy is expected to grow at a faster pace.

Us Fed outcome: On expected lines

Experts noted that the US Fed’s decision to maintain the status quo was widely anticipated and did not come as a surprise.

“Fed walked on the expected lines and kept interest rates unchanged. There wasn’t any major surprise element except for the fact that even the Fed is guessing what President Trump’s next move will be,” said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.

Sheth underscored that the Fed took a wait-and-watch approach and decided to see the impact of the announced policy measures.

According to Aamar Deo Singh, Senior Vice President of Research at Angel One, the US Fed outlined a challenging road ahead. Hence, in the current scenario, a cautious and prudent approach would be more appropriate.

Brace for a longer period of elevated rates

Considering the evolving growth-inflation dynamics in the US and uncertainty surrounding Trump’s policy moves, the belief that interest rates could stay elevated for a longer time is gaining ground.

“It seems that interest rates are likely to remain steady at least for the next six months as the Fed awaits further data,” said Sheth of SAMCO Securities.

Rohit Murarka, Business Head of Kotak Cherry, believes future rate cuts will be data-dependent and are not off the table even as the pause in the rate cut cycle is in line with the strength of the US economy.

Akshay Chinchalkar, the head of research at Axis Securities, pointed out that a resilient labour market and a steadily growing economy give the Fed ample elbow room to assess incoming data as it comes. The FOMC believes that material declines in inflationary pressures need to be seen for the next bout of rate cuts.

“That’s in line with what traders are thinking – the first rate cut for this year is not priced before June, with a total of two cuts aggregating 50 bps expected for the full,” said Chinchalkar.

What it means for Indian stock market? What should investors do?

Elevated interest rates could mean more foreign capital outflow from the Indian markets due to factors such as the tight liquidity situation and investors’ preference for safe-haven assets.

“The Fed voted unanimously to keep rates on hold, with Powell saying the central bank did not need to rush into adjusting policy. Based on these comments, we can conclude that liquidity will not be so readily available in the hands of investors and corporates, especially tech companies. This could dampen the boom for US technology companies in the medium term,” said Shrikant Chouhan, the head of equity research at Kotak Securities.

“For us, this is negative because FPIs will continue to exit emerging markets to invest in safe havens (US bonds). This will put pressure on banks and IT where FPIs are heavily invested,” Chouhan said.

Experts say investors should focus less on the Fed and more on India’s fundamentals, which are witnessing a cyclical slowdown.

“Indian fundamentals continue to remain strong, albeit demand is in the midst of a cyclical slowdown. We continue to remain positive on the banking sector given the comfortable balance sheet structures and constructive valuations,” said Murarka of Kotak Cherry.

According to Ravi Singh, SVP- Retail Research at Religare Broking, a pause by the US Federal Reserve can lead to less global market volatility, offering Indian investors a chance to adjust their existing positions.

“Indian markets will continue to be influenced by domestic factors, such as earnings growth, inflation and government policies. This stability may benefit sectors like banking and financials, as lower global interest rates improve liquidity and profitability,” said Singh.

“Consumer goods may perform well with stable domestic consumption, while infrastructure and real estate sectors could grow due to lower borrowing costs. Additionally, pharmaceuticals and healthcare remain strong as India’s competitive edge in global supply chains continues to drive exports,” Singh said.

Shruti Jain, Chief Strategy Officer at Arihant Capital Markets, said that sectors like IT, which derive a significant portion of their revenue from the US, could benefit in relative terms as global tech spending stabilises. However, Indian export-driven businesses may face headwinds due to potential slowdowns in global demand and higher input costs.

“Investors should adopt a selective approach, focusing on companies with strong fundamentals and resilience to external shocks,” said Jain.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.