Do Fed rates significantly influence Indian markets? Data since the pandemic shows otherwise

The correlation of US Federal Reserve’s rate decisions - long viewed as a key market driver – with Indian equities may be weakening, recent trends have suggested.

Despite multiple Fed rate hikes and pauses after the pandemic, the Sensex and Nifty have largely charted their own path, powered by domestic liquidity, strong corporate earnings and robust mutual fund flows. While each of the Fed announcements has sparked short-lived volatility, the broader trend has stayed resilient.

Since March 2022, the US Fed has raised rates from 0.25 percent to 5.5 percent - a steep 525 bps hike which was the fastest in decades. During this period, India’s benchmark Sensex and Nifty surged nearly 18 percent, far outperforming global peers. In comparison, the S&P 500 and Dow Jones gained only 5 percent each, while the FTSE 100 slipped one percent during this period. Asian benchmarks fared even worse, with the Shanghai Composite and Hang Seng falling 16 percent and 11 percent, respectively. The Topix was nearly flat, while the Kospi lost 8.1 percent. France’s CAC 40 was among the few gainers, rising 5 percent.

When the Fed paused rate hikes between July 2023 to August 2024, Indian benchmarks rose nearly 30 percent, in line with a 25 percent rise in the S&P 500 and 20 percent in the Dow Jones. However, the trend flipped between September and December 2024, when the US Fed cut rates from 5 percent to 4.5 percent. During this phase, the S&P 500 and Dow gained around 10 percent, but the Sensex and Nifty slipped about 3 percent each.