The US Federal Reserve resumed its interest rate cut cycle by reducing rates by 25 basis points to a target range of 4.0-4.25 per cent.
The US Federal Reserve cut its key interest rate by 25 basis points on Wednesday to a target range of 4.0-4.25 per cent and projected it would do so twice more this year. This is the Fed’s first cut this year. While lower interest rates could reduce borrowing costs for mortgages, car loans, and business loans, and boost growth and hiring in the United States, it will have an impact on other markets. Generally, the Federal Reserve rate cuts are considered positive for emerging markets like India. Also, the Reserve Bank of India (RBI) may align with this policy, lowering the repo rate further to bolster investment. The central bank has already cut rates by 100 bps in 2025.
High-growth, low-risk market for foreign investment
According to Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara, a Fed rate cut is critically beneficial for India, strengthening the case for the country as a high-growth, low-risk market for foreign investment.
“While emerging markets may benefit from a Fed interest rate cut, India is sure to profit the most. India is likely to witness an uptick in foreign equity and bond inflows as the US interest rates reduce and US investors seek greater returns on investment. This bolsters liquidity, improves sentiment for the rupee, and enhances overall market sentiment. For the Fed, a rate cut reduces the pressure on the RBI and enhances its leverage in the management of inflation and growth. Circulation banking and construction and infrastructure are likely to benefit the most. Economically, there are a few brackets at play. US interest rate, for instance, might boost the prices of certain commodities, but it might also lower the prices of Indian oil imports. Admittedly, a strong rupee will not be welcome for IT and pharma exporters, but overall, the benefits of the inflows will outweigh a lack of satisfaction,” Maurya said.
Positive for Indian stock markets
According to Pranay Aggarwal, Director and CEO of Stoxkart, the Fed’s decision is broadly positive for Indian stock markets as it improves global liquidity and may attract foreign inflows into Indian markets.
“Softer US yields following the Fed’s rate cut could attract higher FII inflows into Indian stock markets, supporting both the rupee and equities. Improved global liquidity and lower borrowing costs are likely to boost risk appetite, aiding emerging market inflows. If the RBI adopts a more accommodative stance, domestic borrowing costs may ease further, benefiting corporates and driving credit growth,” he said.