Explained: What US Fed’s first 25 bps rate hike in 3 years means for Indian stock market

The US Federal Reserve has raised interest rates for the first time since 2023, stepping in to tackle stubborn inflation that remains well above its long-term target and ending a prolonged period of policy stability.

After a two-day meeting on Wednesday, the Federal Open Market Committee raised the benchmark interest rate by 25 basis points to a range of 3.75%-4.00%. The move marks a significant shift for the US central bank, which had kept rates unchanged through its recent meetings as it assessed the impact of higher energy prices, tariffs and broader price pressures on the economy.

Also Read | A 25 bps hike: US Federal Reserve raises interest rates for first time since 2023


The decision comes as consumer inflation remains stubbornly elevated. Consumer inflation stood at 3.4% in August, unchanged from the previous month and still well above the Fed’s 2% target.

Price pressures have been reinforced by higher energy prices following renewed tensions in the Middle East, the impact of tariff policies and strong demand linked to the artificial intelligence boom.

What does a US Fed hike mean for Indian stocks?

For Indian investors, the Fed’s decision matters well beyond the US. Higher US interest rates can strengthen the dollar, put pressure on the rupee, lift bond yields and add to near-term volatility in Indian equities. For emerging markets such as India, tighter US monetary policy can also influence capital flows and raise borrowing costs globally.

That comes at a time when foreign institutional investors (FIIs) have already sold more than Rs 14,400 crore of Indian stocks over the past two weeks. FIIs continued to sell even after India attracted record subscriptions to special forex-inflow programmes that offered greater regulatory flexibility for hedging, aimed at boosting reserves and supporting the rupee.

Deepak Agrawal, CIO-Debt & Head Products at Kotak Mutual Fund, said the rate hike reflects the Fed’s focus on bringing inflation back towards its 2% goal. “Based on the Fed Dot Plot, the Fed is likely to stay on hold through 2027, with easing in 2028. Given the FOMC’s commitment to bringing inflation down to 2%, this should support long-term bond yields. Rising crude and inflation, along with increasing global rates, may also guide the India MPC to raise rates by 50 bps.”

Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, said the 25-basis-point hike was largely anticipated by financial markets and reflected the Fed’s need to demonstrate its commitment to price stability.

Sawrikar said the bigger issue for markets, however, could be the direction of longer-term interest rates rather than the immediate move in the policy rate. “Sixteen of the 18 participants expect at least one additional rate increase this year, suggesting today’s move is not necessarily a one-time adjustment,” he added.

Stabilisation in longer-term rates would be constructive for equity markets and could allow investor attention to shift increasingly towards corporate fundamentals and the upcoming third-quarter earnings season, Sawrikar said.

Emkay Global said markets are currently focused on the latest inflation data and the recent spike in oil prices, which have been key drivers of the rate-hike cycle. However, the brokerage believes the broader shift towards tighter policy is being driven by growing evidence that current policy rates may not be restrictive enough to contain the cyclical upturn and its impact on inflation.

The brokerage said the path for emerging market central banks remains far less uniform, with domestic conditions driving significant divergence across countries. India, meanwhile, saw an upside surprise in August 2026 core CPI last week, which came as the final trigger after hawkish MPC minutes, the recent spike in energy prices and stronger-than-expected growth. Emkay Global said a 25-basis-point rate hike by the RBI in October 2026 now looks more likely, although it expects the hiking cycle to remain shallow at 50-75 basis points.

JM Financial said the global rate-hiking cycle, driven by elevated crude oil prices, does not appear favourable for risk assets such as equities.

The brokerage said it continues to believe that the trajectory of crude oil prices will determine macroeconomic variables and, ultimately, the policy response going forward. It added that a stronger US dollar would put pressure on emerging-market currencies, including the INR.

Kevin Warsh’s big challenge

The rate hike is also a major test for Fed Chair Kevin Warsh, who took over the central bank earlier this year. Warsh had avoided offering clear guidance on the path of interest rates, but had signalled that the Fed would act if inflation failed to slow meaningfully.

The move could also put Warsh at odds with US President Donald Trump, who had picked him with the expectation that he would support lower interest rates to boost economic activity. Trump has repeatedly pushed the Fed to cut rates, arguing that lower borrowing costs would support growth. But elevated inflation has left the central bank with less room to ease policy.

More rate hikes on the table?

At his press conference, Fed Chair Kevin Warsh said neither he nor his fellow policymakers were satisfied with the current pace of inflation. “Our predominant focus is on the price stability side of our mandate,” he said. “The plain fact is that inflation is too high and has been for too long.”

Morgan Stanley expects the Fed to deliver another quarter-point increase in December, following recent US inflation data that came in stronger than expected. The brokerage has turned more hawkish on the US rate outlook, citing a slower and less convincing disinflation process.

Morgan Stanley now expects two Fed rate hikes this year and sees the central bank signalling the possibility of further tightening before eventually pausing as inflationary pressures ease.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)