Nervousness persisted among major global equity markets ahead of a key consumer inflation reading from the US — the world's largest economy — that may offer more clarity on the future course of COVID-era interest rates. Investors on Dalal Street remained on the back foot as an overnight slump on Wall Street sent ripples to Asian markets.

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The focus also turned to inflation after American voters delivered a mixed verdict in midterm elections, with Republicans headed for control of the House of Representatives by more modest margins than earlier anticipated.

Analysts say a divided Congress will likely come in the way of bolder fiscal moves —or tax changes — though it may not bother the market much as the focus may remain on the monetary side — or interest rates.

How are the markets reacting?

Indian equity benchmarks Sensex and Nifty dropped less than one percent in early deals and fared better than most of their Asian peers. Analysts say the Indian market has outperformed much of the region amid optimism on resilience of the economy, sustained FPI inflows and some valuation comfort relative to their recent peaks though the aggressive interest rate environment and a mixed corporate earnings season play spoilsport.

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MSCI's broadest index of Asia Pacific shares outside Japan as well as Japan's Nikkei 225 tumbled 1.1 percent each. Hong Kong's Hang Seng fell 1.9 percent and China's Shanghai Composite 0.7 percent. S&P 500 futures rose 0.2 percent in Asian trade, suggesting a mildly positive start in the US on Thursday.

Overnight on Wall Street, the three main headline indices — the S&P 500, the Dow Jones and the Nasdaq Composite — finished with losses of 2-2.5 percent.

What does the road ahead look like?

Chaos in the US Congress might actually be good for the markets. Here's why.

"Overall, a divided government is good for businesses as the Biden administration will not be able to pass legislation for higher taxes on corporates," said Madhavi Arora, Lead Economist at Emkay Global Financial Services.

"This is the best performance by the sitting President's party in the midterms since 2002, largely due to abortion rights and the threat of continued election denial by the Republicans... The expected red wave did not materialise," she said. "The Republicans have done quite poorly even though they are still likely to win majority in the House."

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The midterm elections come at a time when global central banks — including the likes of the Fed and the RBI — are scrambling to tackle red-hot inflation with rapid and steep hikes in benchmark interest rates. They are required to find the sweet spot where too much policy tightening does not hamper economic growth too much, amid warnings of at least a mild global recession.

Back home, the RBI has hiked the repo rate — or the key interest rate at which it lends money to commercial banks — by 190 basis points to 5.9 percent in four instalments since May. In its last policy review, in end-September, the central bank warned of more rate hikes as it maintained its inflation forecast for the year ending March 2023 but lowered its GDP projection by 20 basis points.

"The earnings season hasn't really transpired in any healthy manner... Given the weak rural, pressure from a global slowdown and rising interest rates, it's very difficult to see how you can have significant earnings upgrades. We are at the top tier of valuations, when the cost of capital has gone up dramatically and very fast. That leaves very little room for error as far as valuations are concerned," Rajesh Bhatia, MD and CIO, Long-Short Equity Fund, Investment Trust of India, told CNBC-TV18.

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