The Federal Reserve’s interest rate rise took place in Washington, and Mumbai adjusted its prices by morning.
The Federal Reserve’s decisions don’t end with Wall Street either; higher U.S. interest rates can influence where global investors place their money, strengthen the dollar, put pressure on the rupee, and affect how much investors are willing to pay for Indian stocks before the Nifty and Sensex even reopen.
The Indian stock market had closed on September 16 when the Federal Reserve made a decision capable of affecting the following trading day in Mumbai. The Federal Reserve increased its benchmark interest rate range by 25 basis points to 3.75% to 4.00%, its first increase since 2023. The decision was unanimous, 12-0. U.S. stocks had some difficulty in understanding the announcement at first before ending the day lower, the Dow dropping by 1.21 per cent, the S&P 500 falling 0.45 per cent and the Nasdaq Composite finishing almost unchanged, as reported by Reuters in its coverage of the global market reaction.
In India, the session had been completed thousands of miles away several hours before. The Nifty 50 increased by 0.43 per cent to 23,217.60 and the BSE Sensex rose by 0.45 per cent to 74,336.45, but according to Reuters the rally had already been held back by concerns regarding the upcoming Fed decision and the high oil prices. It is for this reason that Indian financial television dedicates so much time to discussing Washington. The Federal Reserve announces its major decisions at 2 p.m. Eastern Time, which was 11:30 p.m. in India during this meeting. When American investors have reacted, it is time for Mumbai to go to sleep. When India’s market resumes trading, it will need to make up for the lost ground.
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The very first link between Wall Street and Mumbai is money. If interest rates in the United States go up, Treasury securities become an attractive option for investors since they provide a higher return together with a low level of credit risk. This in turn affects the way global funds decide whether to hold a U.S. bond, an S&P 500 stock or an Indian equity.
It is not necessary for all foreign investors to sell in order for the effect to be significant. A small change in behaviour can reduce demand for Indian shares, especially since global investors are already concerned about oil, inflation or currency risk. The Reserve Bank of India has identified volatility in portfolio capital flows caused by global spillovers as a major source of exchange-rate volatility in India; the RBI’s research in particular shows that periods of synchronized global monetary tightening are times when pressure on Indian financial conditions increases.
This sets off a chain reaction. Higher interest rates in the United States make American assets comparatively more attractive. Foreign capital may then become more selective when it comes to India. A stronger dollar can put pressure on the rupee. If the rupee weakens, imported goods will become more expensive. Indian bond yields can go up as investors require greater compensation. And higher yields can in turn lead to lower valuations being assigned by investors to stocks. A decision by the Fed in Washington can thus have an effect on an Indian company which has never sold any of its products in the United States.
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At this moment the currency channel is particularly important. Before the Fed made its decision, the Indian rupee was around a six-week low at about 95.96 to the dollar. According to Reuters, the state-owned banks were selling dollars in transactions which the traders thought showed that the Reserve Bank of India had intervened. The Fed was not the only source of pressure; oil prices exceeding $100 per barrel were contributing as well.
It is important because India purchases large quantities of energy from other countries. The government’s Petroleum Planning and Analysis Cell monitors the major ongoing imports of crude oil, which means that the dollar price of energy is a key macroeconomic factor for the country. Consider it to be a case of two exchange rates. If the price of oil rises when measured in dollars and at the same time the dollar grows stronger relative to the rupee, India may see a greater increase in its effective energy bill, this in turn impacting transportation and manufacturing costs, corporate profit margins and inflation expectations.
Indian shares could eventually be affected by those pressures. Companies such as airlines, car manufacturers, consumer goods firms and other businesses which are sensitive to fuel costs or rely on imported inputs may end up with higher expenses. Banks can be affected if high domestic interest rates continue for a longer period. Companies that are currently highly valued might come under pressure since investors will discount the firms’ future earnings at higher interest rates.
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There is also a direct connection to Wall Street valuation. Following the Fed’s announcement, the U.S. two-year Treasury yield increased and the benchmark 10-year yield reached about 5%. The dollar also appreciated, as reported by Reuters’ global market coverage. The importance of those figures is felt by both markets since stocks and bonds are competing for capital.
Since investors can obtain about 5% from a U.S. Treasury security, an expensive stock in New York must offer a sufficient amount of expected growth in order to make it worthwhile to take on extra risk. The same reasoning applies to capital around the world; an Indian stock too must provide an attractive enough expected return in order to compensate a foreign investor for the risks of equity, currency and exposure to emerging markets. That is why increasing American bond yields can have an effect on both the S&P 500 and the Nifty 50 even though the two indexes consist of completely different companies.
The fact that there is a connection does not imply that the indexes always change by the same percentage or even in the same direction; it only means that the price of global capital has changed for both of them.
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There is a significant reason why one should not exaggerate the control that Wall Street has over India. India now has a considerably bigger domestic investor base which is able to absorb at least some of the foreign selling. The Association of Mutual Funds in India recorded a record ₹32,297 crore in systematic investment plan contributions during August, and Reuters stated that total equity mutual-fund inflows rose by 18.8% compared with July.
The fact that domestic money is important. It was possible twenty years ago for fluctuations in foreign institutional capital to have an even more significant impact on Indian equities. Nowadays, millions of Indian households make regular investments via mutual funds and SIPs. This means there is a demand source which will not vanish even if the Federal Reserve increases its rates by 25 basis points.
India has also recently seen a revival of foreign interest. As international capital has returned to a number of Asian markets, foreign investors bought approximately $3.1 billion worth of Indian equities, Reuters says in its analysis of Asian portfolio flows. The right conclusion therefore is that the Fed does not control India’s stock market. The fact is that the Fed alters the terms on which Indian stocks are priced. That distinction matters.
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The example of the connection is unusually clear in the trading sessions of September 16. Before the Fed made its announcement, Mumbai ended the day with only small gains. Hours later, Washington increased interest rates, which caused U.S. Treasury yields to go up, the dollar to strengthen, and Wall Street to close down. India was not able to respond since its exchanges were already closed.
The following Indian session is therefore included in the same global trade. Investors will keep an eye on whether foreign funds move out of Indian equities, whether the rupee faces further pressure, whether yields on Indian bonds go up and which sectors are affected the most. They will also monitor Wall Street since another fall in U.S. stocks can strengthen global risk aversion, while a recovery can lessen it.
Although the Federal Reserve is America’s central bank, the dollar is still the central currency in global finance. Which is why a decision announced in Washington in the late hours of the night will be one of the most important stories on Dalal Street the next morning.
Follow TerreneGlobe as we keep an eye on what happens next to the Nifty, Sensex, S&P 500, Treasury yields and the rupee. The Fed carried out its action in Washington. The key question now is how Mumbai will price it.