Indian benchmark indices, Nifty and Sensex, are bracing for a cautious start to Thursday's trading session following a 25 basis point rate hike by the US Federal Reserve overnight. While the increase was largely anticipated, its implications are already being felt across global markets, including a downturn on Wall Street.
Gift Nifty, a dollar-denominated futures contract reflecting the Nifty 50 index, traded at 23,211, down 59.50 points or 0.26 percent. This movement suggests a subdued opening for domestic Indian indices, as investors digest the Fed's latest move and its hawkish stance, which indicated at least one more rate hike before the end of 2026.
Impact on Rupee and Foreign Flows
The Fed's decision is expected to bolster the US dollar, which saw its index climb to 100.30 overnight. A stronger dollar typically exerts pressure on the Indian rupee, potentially leading to its depreciation. A weakening rupee, in turn, often triggers outflows of foreign equity from India, a trend already observed this month.
Data from depository NSDL reveals that Foreign Portfolio Investors (FPIs) have divested equities worth Rs 17,222 crore so far this month. This follows two preceding months where FPIs had infused a combined Rs 49,831 crore into Indian stocks, highlighting a significant shift in sentiment.
Expert Insights on India's Outlook
Hariselvan Radhakrishnan, Founder & CEO of HST Wealth, elaborated on the potential ramifications for India. "For India, higher US interest rates could strengthen the dollar, pressure the rupee, and weigh on foreign investment flows into emerging markets," he stated. Radhakrishnan also pointed to domestic inflation concerns, with India's consumer price inflation rising to 4.82 percent in August from 4.45 percent in July, which could influence the Reserve Bank of India's policy stance.
The combination of elevated domestic inflation and increased global borrowing costs may delay expectations of monetary easing, keeping funding costs high and limiting the scope for valuation expansion in the Indian market, according to Radhakrishnan.
Ponmudi R, CEO of Enrich Money, echoed this sentiment, suggesting that Indian markets are likely to remain vulnerable. He noted that the Fed's hawkish stance, aimed at curbing persistent inflationary pressures (including those linked to elevated oil prices), has pushed US Treasury yields higher and further strengthened the dollar.
In India, the 10-year government bond yield remains elevated near 7.09 percent, reflecting the pressure from higher global yields, persistent crude oil prices, and the continued weakness of the rupee.
Global Market Reactions
Overnight, Wall Street saw significant declines, with the Dow Jones Industrial Average falling 631.21 points (1.21 percent) to settle at 51,461.90. The S&P 500 ended down 33.92 points (0.45 percent) at 7551.81, while the Nasdaq remained largely flat.
Asian markets presented a mixed picture in early trade. Hong Kong's Hang Seng index fell 1.3 percent, and the Shanghai Composite declined 0.5 percent. In contrast, Korea's Kospi and Japan's Nikkei indices traded relatively flat. These uneven regional cues, coupled with high oil prices, rising US Treasury yields, and currency pressures, are expected to foster a cautious investor sentiment globally.