US Fed flags heightened uncertainty: What it means for Indian stock market?

The trade war triggered by former US President Donald Trump’s tariff policies has fueled significant uncertainty, not just about the US economy, but about global economic growth as well. The situation is so unpredictable that even the US Federal Reserve Chair Jerome Powell appears to be clueless about the impact of Trump’s tariff policies on the world’s largest economy.

Reuters quoted Powell describing the US administration’s tariff plans as “fundamental changes,” which offer little historical precedent for businesses or economists to model.

“These are very fundamental policy changes. There isn’t a modern experience of how to think about this,” Powell said.

US Fed flags heightened uncertainty, to wait for more clarity

Last Wednesday, at the Economic Club of Chicago, Powell warned that Trump’s tariff policies could drive up inflation and unemployment.

According to Reuters, Powell underscored the risk of a complex scenario of higher consumer prices due to tariffs along with subdued economic growth and a weakening labour market, which could result in inflation and employment deviating from the US Fed’s goals.

The central bank’s chief hinted that interest rates might not come down in the near term.

“The central bank would remain patient and wait for more clarity on the economic outlook before considering any changes to interest rates,” Reuters quoted Powell as saying.

US Fed’s hawkish tone: What does it mean for the Indian stock market?

Powell’s hawkish tone goes against market expectations of swift rate cuts amid concerns about a looming recession in the US.

However, this is unlikely to affect sentiment in the Indian stock market significantly. This was evident in market performance, with the Sensex rising 2 per cent on Thursday following Powell’s remarks.

“The US Federal Reserve’s remarks on Wednesday appeared to be more hawkish than what the market had anticipated, which was largely expecting a neutral stance,” Narendra Solanki, Head Fundamental Research – Investment Services, Anand Rathi Shares and Stock Brokers, observed.

“Despite this shift, I believe India remains relatively insulated from the immediate impact of these developments. This is primarily because the current inflationary pressures in the US seem to be driven more by domestic policy dynamics and localised demand-supply mismatches rather than global macroeconomic factors,” Solanki added.

Experts highlight India’s healthy macroeconomic situation at the current juncture. Inflation is below 4 per cent and is expected to remain around that level in FY26. GDP growth is projected at above 6 per cent for the current financial year, supported by expectations of a normal monsoon.

Experts expect the Reserve Bank of India to cut rates further due to favourable inflation-growth dynamics.

“From India’s perspective, we are currently in a 90-day pause period with respect to the US tariffs policy, providing the Reserve Bank of India (RBI) with some breathing space to monitor global developments while focusing on domestic indicators. Given the current trajectory of inflation and economic activity in India, we may expect at least one rate cut by the RBI within this window,” said Solanki.

The US Fed may not be an immediate trigger for the market. Instead, the focus will be on the March quarter (Q4) earnings, which will dictate market sentiment.

“We do not foresee any immediate downside risks to rate-sensitive sectors in the near term stemming from the US Fed statement. Instead, the short-term performance of these sectors is more likely to be influenced by the outcome of Q4 earnings, which will be a key driver for investor sentiment and sectoral movement in the upcoming weeks,” Solanki said.

According to Sneha Poddar, AVP, research analyst- broking and distribution at Motilal Oswal Financial Services, if there is a tariff-induced rise in US inflation, the Fed may delay any further rate cut or even consider interest rate tightening. This could cause FIIs to withdraw from Indian equities, putting pressure on the broader market.

The Fed’s interest rate decisions have a cascading effect on Indian rate-sensitive stocks through capital flows, currency valuation, and domestic interest rates.

“The impact on rate-sensitive stocks depends on the reactions of central banks (both in the US and India) over the next three to six months, wherein they are expected to offer more conciliatory alternatives to resolve the current complex global economic landscape,” said Poddar.

On the other hand, Poddar believes India could be an incremental beneficiary of any reversal in FII flows if global investors grow increasingly concerned about a potential US economic slowdown in the coming quarters.

Poddar noted that the evolving situation regarding global liquidity and FII flows will be an important determinant of stock market performance.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.