US Federal Reserve cuts interest rates: How it affects India?
What's the story
The US Federal Reserve has cut interest rates by 25 basis points (bps) for the third time this year, bringing the federal funds rate to its lowest level since 2022. The decision comes after two previous cuts of 25bps each in September and October. The move is expected to have a muted impact on the Indian stock market as it continues to focus on domestic factors such as corporate earnings and growth trends.
Policy division
Fed's decision influenced by economic indicators
The Federal Open Market Committee (FOMC), led by Jerome Powell, was divided over the rate cut. Nine of the 12 members voted in favor, while one member called for a more aggressive 50bps cut. Despite this division, only four policymakers predicted a single rate cut next year. The Fed's future decisions will depend on incoming economic data amid signs of slowing growth and elevated inflation in the US economy.
Economic outlook
Experts weigh in on Fed's monetary policy
Jeffrey Roach, Chief Economist for LPL Financial, said there is no risk-free path for monetary policy. He noted that the committee seems to be banking on higher productivity, which indicates stronger growth despite slower job creation. Charlie Ripley from Allianz Investment Management also commented on the difficulty of rate-cut decisions amid softer labor conditions and inflation moving away from the Fed's target.
Market impact
Indian stock market's response
The Indian stock market is not expected to react sharply to the Fed's policy as it was largely anticipated. G Chokkalingam, founder and head of research at Equinomics Research Private Limited, said the domestic market is grappling with liquidity issues due to a surge in IPOs. However, a dovish Fed usually puts pressure on the US dollar and benchmark bond yields, increasing foreign capital inflows into emerging markets like India.
Rate projections
Market experts discuss potential future rate cuts
VK Vijayakumar, Chief Investment Strategist at Geojit Investments, observed that the Fed's moves indicate one more rate cut in 2026 and another in 2027. He stressed the importance of economic data in determining future monetary policy decisions. Despite these predictions, Vijayakumar believes the direct impact of US Fed policy on the Indian stock market will be nominal due to domestic factors like FII selling and weak corporate earnings over six quarters.