As widely expected, the US Federal Open Market Committee (FOMC) on January 28 maintained a status quo on policy rates, after cutting rates in three consecutive policy meetings in September, October, and December last year. The Committee decided to keep the target range for the federal funds rate at 3.5% to 3.75%, its lowest level since 2022.
The Fed has decided to hold rates steady after reducing the federal funds rate by 0.75 percentage points in 2025. The decision comes on the back of the Committee’s assessment of economic activities, which it finds “expanding at a solid pace.”
The FOMC noted that “job gains have remained low, and the unemployment rate has shown some signs of stabilization. Inflation remains somewhat elevated.”
“Available indicators suggest that economic activity has been expanding at a solid pace. Consumer spending has been resilient, and business fixed investment has continued to expand. In contrast, activity in the housing sector has remained weak,” said Federal Reserve Chair Jerome Powell.
How can the US Fed policy decision impact the Indian stock market?
A status quo on rate cuts is unlikely to have a significant impact on the Indian stock market, as it was widely expected by market participants.
“The market had already discounted this status quo on policy rates. The policy decision is unlikely to affect the Indian stock market. A 25 basis points rate cut would have given a mild boost to the market,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited.
Furthermore, a status quo on rates may strengthen the dollar and impact flows to emerging markets. This may weaken the rupee and turn out slightly negative for equities.
“A hold reinforces ‘higher-for-longer,’ stance, keeping US yields high and the dollar firm,” Manoranjan Sharma, Chief Economist at Infomerics Ratings, noted.
“Flows to emerging markets remain selective, limiting upside for India. The rupee may see mild pressure, with RBI intervening only to smooth volatility. Equities are likely neutral to mildly negative, with rate-sensitive sectors pausing. Bond yields have limited downside; long-duration bonds may underperform,” Sharma added.
According to G Chokkalingam, the founder and head of research at Equinomics Research Private Limited, the Fed’s policy decision is not a factor for the market, and even a 25 BPS rate cut would not have been a major event for the domestic market.
“The Fed’s policy decision doesn’t matter for India at all. The market is more focused on other issues, such as corporate earnings, the retail liquidity crunch, the FII selling, and the India-US trade deal,” said Chokkalingam.
After the India-EU free trade agreement, the market awaits cues on a potential India-US trade deal. An India-US trade deal will help the rupee regain some strength and may even drive FIIs to the Indian markets.
“The US Fed issue is suppressed now. The priority is more for the US trade move rather than the Fed move, as it may stabilize the rupee exchange rate, because when the rupee is weak, the Fed rate cut will not induce more debt inflow from the US to India. The rupee’s weakness can be arrested if the tariff issue gets resolved between India and the US,” Chokkalingam pointed out.
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