The US Federal Reserve has kept the interest rates unchanged in this policy meet. On the one hand, it expressed confidence in continued drop in the unemployment rate, which could be nearing the full employment zone. However, US Fed wants to see more evidence of improvement in the labour market. Lower inflation and the flattening of the yield curve adds to the US Fed's discomfort.

Commenting on US Fed policy and its implication for Indian markets, Kamlesh Rao, CEO, Kotak Securities said, ''There is little possibility for structural inflation as the economy is awash with abundant supply and savings. Even as the large scale stimulus in China may offers a transitory relief, US Fed may want to get out of the zero bound rates soon.

It is also apprehensive of the risk of financial sector misallocation, which may pose systemic risk in the future. It sees normalisation of rates as an important step towards proving the success of its 8 year old emergency policies. Hence, at least one hike before the year end appears likely.

However, the markets have almost priced in a rate hike expected in the September meeting as the next couple of months' employment data is expected to be good.''

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