Summary On the US FED Meeting.

 The Feds decided to keep its benchmark rates unchanged and signaled that there would be at least 2 rates cuts this given the uncertainty of the economic growth.

·       The Fed expects the unemployment rate to tick up to 4.4% by the end of this year.

·       Policymakers expect the inflation rate to go up 2.7% this year from its current level of 2.5% and both are above the central bank targets.

·       Powell says the central bank has moved up on the estimated chances of a recession and the outside forecaster projection of the recession has moved up but not high as of now. He also stated that there is always an unconditional probability of a recession in the range of one in four at any time.

·       The tariffs play a major part in the forecast of higher inflation and now they are working on the forecast by removing the non-tariff inflation from the tariff inflation.

·       The Fed downgraded its economic growth outlook, while raising its inflation projection. The central bank now sees the U.S. economy growing at a 1.7% pace this year, down 0.4 percentage points from what it forecast in December. Core inflation is expected to grow at a 2.8% annual pace, up 0.3 percentage points from the prior reading.

·       Right now, the hard data has been solid, although survey data has shown significant rises in uncertainty and concerns about downside risks. However, the relationship between survey data and economic data hasn’t always been very tight, Powell noted.

·       Recent indications, however, point to a moderation in consumer spending following the rapid growth seen over the second half of 2024

·       The Reserve Bank of India (RBI) has cautioned that escalating trade tensions and global financial volatility are testing economic resilience, a key concern as the Federal Reserve prepares its policy decision.

·       Despite global headwinds, the Indian economy remains resilient, supported by strong agricultural performance and improving consumption. However, sustained foreign portfolio outflows highlight external pressures that central banks worldwide, including the Fed, must consider in their policy outlook.

·       Indian equity markets extended their winning streak for the third consecutive session on Wednesday, buoyed by strong buying in heavyweight stocks such as L&T, HDFC Bank, and Reliance Industries. The Nifty 50 closed above 22,900, supported by fresh foreign capital inflows ahead of the US Federal Reserve’s policy decision. The BSE Sensex gained 147.79 points, or 0.20%, to end at 75,449.05.

·       Stocks rallied on Wednesday, with the S&P 500 clawing back more of the rout since late February that took the benchmark briefly into correction territory

 

The recent Federal Reserve meeting and its policy decisions can have various implications for the Indian debt, equity, and forex markets.

 

1. Indian Debt Market

Interest Rates Impact: The Fed's decision to hold rates unchanged but signal the possibility of rate cuts in the future may prompt a shift in global interest rate expectations. If the Fed cuts rates as projected, U.S. bond yields might fall, which could make Indian bonds relatively more attractive to foreign investors seeking higher returns. This may result in capital inflows into the Indian debt market, potentially lowering yields in India as demand increases for government bonds.

Inflation Expectations: The Fed's inflation forecast increase (from 2.5% to 2.7%) could influence global inflationary pressures, and this might impact India’s inflation outlook. If inflation expectations rise globally, the Reserve Bank of India (RBI) could face pressure to adjust its own policy stance, especially considering domestic inflation dynamics. This could create volatility in the Indian debt market, as bond yields are sensitive to inflationary trends and central bank policies.

Global Liquidity: With the possibility of Fed rate cuts, liquidity conditions globally could ease, potentially benefiting emerging markets like India. Lower U.S. rates may lead to increased foreign investment in Indian debt markets as investors seek higher yields.

 

2. Indian Equity Market

Sentiment and Foreign Investment: The Fed’s decision to signal potential rate cuts and the global economic uncertainty might lead to an increase in risk appetite among global investors, which could be positive for emerging markets like India. A dovish Fed stance might lead to a boost in foreign investment flows into Indian equities.

Global Risk Appetite: The Fed's cautious tone on recession risk and its downgrade of U.S. economic growth forecasts might prompt investors to seek safer assets, which could be mixed for Indian equities. However, strong foreign inflows into the Indian stock market ahead of the Fed decision, as seen with heavy buying in L&T, HDFC Bank, and Reliance Industries, could continue if global markets remain relatively stable.

Sectoral Impact: With the Fed signaling moderation in consumer spending, sectors tied to consumer demand might face more pressure, while sectors like IT, pharma, and infrastructure could benefit as they are less sensitive to domestic consumption trends.

 

3. Indian Forex Market

Currency Impact: The Fed's policy decision can impact the USD/INR exchange rate. The possibility of future U.S. rate cuts might weaken the U.S. dollar, which could result in a strengthening of the Indian Rupee (INR). If U.S. yields fall, investors might reduce their demand for U.S. dollars and move funds into higher-yielding emerging market assets, like Indian bonds and equities, which can increase the INR’s value.

Global Risk Sentiment: The Fed’s recession outlook and its effect on global risk sentiment could lead to higher volatility in the forex market. The INR could be affected by changes in global risk appetite. If concerns about a recession rise globally, there might be a flight to safe-haven currencies like the USD, which could weigh on the INR.

Foreign Portfolio Flows: The positive performance of Indian equity markets driven by foreign capital inflows may help support the INR. However, any change in global investor sentiment, especially if U.S. growth slows significantly or recession fears deepen, could affect foreign portfolio flows and, consequently, impact the forex market.

 

FII & DII data of the Indian market (Source: Money control):

 

1.    Cash Market:

2.     Futures & Options: Index

3.     Futures & Options: Stocks