How the Fed rate move could reshape Indian markets

The US Federal Reserve in its FOMC meeting on March 19, 2025, kept the interest rates unchanged at 4.25- 4.50%, signaling a cautious stance amid a mixed economic outlook.

The revised projections highlight slowing growth, rising unemployment, and persistent inflation, raising concerns of a potential stagflationary environment. However, the Fed downplayed recession risks, said Tata Mutual Fund in a note on Fed Rate Cut.

Commenting on the US Fed Meeting announcement, Suresh Darak, Founder, Bondbazaar, noted that following the two-day FOMC meeting, Federal Reserve Chair Jerome Powell aimed to alleviate concerns about an impending economic slowdown while maintaining that inflationary pressures from trade policies would be temporary. However, Powell’s statement “we really can’t know” if the inflationary effect will indeed be temporary, highlights the uncertainty surrounding the central bank’s inflation outlook.

“The possibility of further rate cuts in 2025 remains uncertain, with the 10-year US Treasury yield remaining range-bound after the meeting. This uncertainty is likely to persist until more data on inflation and growth becomes available,” added Darak.

Ashwani Dhanawat, Executive Director & Chief Investment Officer, Shriram General Insurance, said the Federal Reserve has made notable adjustments to its 2025 economic forecasts, lowering the GDP growth projection from 2.1% to 1.7%, while also raising the unemployment forecast to 4.4% from 4.3%.

Additionally, “the forecasts for both overall PCE inflation and core PCE inflation have been increased to 2.7% and 2.8%, respectively, up from 2.5%. These weakened macro projections suggest a more cautious economic outlook, which could influence monetary policy decisions moving forward,” he added.

The market is reacting, with futures indicating a 62.1% probability that the Fed will resume rate cuts in the upcoming June meeting, reflecting a slight increase from the previous 57%. This shift signals trader sentiment that the Fed may need to take more accommodative steps to support the economy amid lower growth expectations and rising inflation concerns.

“The implications of these developments could lead to increased volatility in financial markets as investors recalibrate their strategies in response to the Fed’s evolving outlook,” observed Dhanawat.

Impact on Indian Markets

1. Indian Rupee (INR)

* The INR remains vulnerable as the Fed’s cautious stance, combined with sticky inflation in the US, could support the dollar (USD).

* If US rate cuts are delayed, capital outflows from emerging markets like India could increase, leading to INR depreciation.

2. Indian Bond Yields

* India’s 10-year bond yields have remained stable but could face mild upward pressure if US bond yields rebound in response to future inflation data.

* A dovish tilt from the RBI is likely in mid-2025, aligning with global rate-cut cycles, but domestic inflation trends remain a key factor.

3. Gold Prices

* Gold prices gained slightly as lower bond yields increased the appeal of non-yielding assets like gold.

* If US inflation persists, gold could rally further, especially if the April 2 trade policy decision introduces tariff-driven inflation risks.

Key Focus: April 2 US Trade Policy Decision

* The larger driver for global markets will be the upcoming US trade policy announcement on April 2.

* If new tariffs are imposed, it could:

– Increase inflationary pressures if supply chains get disrupted.

– Lead to retaliatory measures from trading partners, affecting global trade.

– Put additional pressure on emerging markets like India due to higher import costs.

* However, the March FOMC commentary suggested that inflation is “transitory”, meaning the Fed does not expect tariffs to significantly impact prices.