Trade View: Fed Holds, but Rate-Hike bets rise
The US Federal Reserve kept the federal funds rate unchanged at 3.50-3.75%, as was widely expected. The decision drew three dissents, the largest number since 2019, with Beth Hammack, Neel Kashkari and Lorie Logan favouring a 25-bps rate hike, signalling growing concern within the FOMC over persistent inflationary pressures.
However, lack of forward guidance from the Fed — a decision driven by the new Fed Chair — has increased uncertainty and volatility in the bond market with the 30 year yield rising to 5.23% - - 19 year high. The market also become concerned over Kevin Warsh’s credibility to bring down inflation.
Meanwhile the West Asia conflict continued to escalate with resumption of strikes in the region. Brent crude prices rose close to $90 pbl yet again.
Attention will now turn to the BoE’s policy decision later today, followed by the BoJ’s decision tomorrow, with both central banks expected to keep rates unchanged. US Q2CY26 GDP and PCE inflation data are also due later today. GDP growth is expected at 2.3% QoQ annualised, up from 2.1% in Q1, while PCE inflation is expected to moderate to 3.7% YoY in June from 4.1% in May.
Market Reaction: Overall policy statement retained a hawkish tone, noting that economic activity continues to expand at a solid pace, while inflation remains elevated, partly reflecting energy-related supply shocks arising from the conflict in the Middle East. Fed Chair Kevin Warsh, in his press conference, reiterated the Fed’s firm commitment to its 2% inflation target. The US Dollar Index (DXY) slipped below 101 following the Fed’s decision. Markets are now pricing in a 57% probability of a 25-bps rate hike at the Fed’s September meeting, according to the CME FedWatch Tool. While September may still be early, we do see an increasing chance of a rate hike in the December policy by the Fed.
Brent: Brent crude surged by over 6% to trade above USD 90/bbl amid a renewed escalation in the Middle East conflict. US and Saudi forces, in coordination with the Iraqi government, targeted logistics facilities linked to Iranian-backed militias in eastern Iraq.
USD/INR: In the domestic market, the rupee strengthened by 0.2% (vs USD) to close at 95.6475 yesterday, strengthening for the fourth consecutive session amid a rally in domestic equities and FII inflows. With geopolitical tensions escalating and crude oil prices rising, the rupee is likely to trade with a depreciation bias. We expect USD/INR to trade in the 95.50-96.50 range in the near term.
India Bond Yields: The 10Y benchmark yield closed 2 bps higher at 6.7964% yesterday, tracking higher crude oil prices after renewed US air strikes in the Middle East heightened concerns over a wider regional conflict. We expect the 10Y yield to trade in the 6.75-6.85% range in the near term.
System Liquidity: The liquidity balance stood at a surplus of INR 1.06 lakh crore as of Jul 28, 2026. The RBI conducted a 1-day VRR auction of INR 50,000 crore yesterday, which was fully subscribed. Liquidity conditions are expected to remain comfortable this week, supported by month-end government spending.