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Below the Quote on US Federal announcement by Vinit Bolinjkar - Head of Research - Ventura

“The US Federal Reserve has raised interest rates by 25 basis points, taking the policy range to 3.75%–4.00%. The key point is not the size of the increase, but the change in direction. This is the first US rate hike since 2023, and most Fed officials have indicated that they are open to at least one more increase this year. The message is clear — global interest rates are moving higher again rather than declining. For India, this matters because a Fed that is in a hiking cycle reduces the comfort level that the RBI had earlier. A narrower gap between Indian and US interest rates can keep pressure on the rupee and reduce foreign investor interest in Indian bonds.

At the domestic level, inflation has been moving higher consistently. Retail inflation increased to 4.82% in August, marking the tenth consecutive monthly rise and the highest level since December 2024. Inflation has remained above the RBI’s 4% target for three straight months. Food inflation is close to 6%, while core inflation is also gradually increasing, indicating that price pressures are becoming broader rather than being limited to a few categories. Wholesale inflation has seen a sharper rise, reaching 9.92%, mainly driven by higher fuel and power prices following the energy shock from the Gulf conflict. A significant part of this increase in input costs is yet to fully reflect in retail inflation.

The bond market has already started adjusting to these developments. The 10-year government bond yield is trading near 7.05%, close to a four-month high, and has increased by around 60 basis points over the past year. Multiple factors are contributing to the rise — higher crude oil prices, an increase in US bond yields, the RBI’s planned bond sales, and expectations that domestic rate cuts may have largely run their course. Some market participants have also started considering the possibility of a rate hike during the October policy review.

Overall, these factors leave limited room for the RBI as it approaches its 5–7 October meeting. The repo rate currently stands at 5.25% after 125 basis points of cuts during 2025, while the policy stance remained neutral in August. Since then, conditions have become less supportive for further rate cuts — inflation is rising, wholesale prices remain elevated, bond yields are near 7%, and the Fed has shifted back towards rate increases. Our base case is that the RBI maintains status quo on rates but adopts a more cautious and hawkish tone. The probability of another rate cut has reduced significantly, and a surprise cut appears unlikely unless crude oil prices decline meaningfully from current levels.”

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