This move followed months of pressure from US President Donald Trump for lower rates. In August, Powell had already signalled that rate cuts were coming during his speech at the Jackson Hole Symposium.
The market reaction in India has been measured. On Thursday, the Nifty 50 was up 0.36% (or 91.55 points) at 25,421.80, while the Sensex gained 0.41% (or 342.44 points) to reach 83,036.15.
Mint examines the implications of the Fed decision for the Indian debt markets and the upcoming monetary policy meeting of the Reserve Bank of India (RBI).
What is the impact on India’s rate trajectory?
The RBI has cut the repo rate by 100 basis points cumulatively since February, with an outsized and surprising 50-basis-point cut in June alone.
Meanwhile, domestic growth numbers have surprised many. The Indian economy clocked a five-quarter high growth of 7.8%, according to estimates released on 29 August, beating the 6.7% projection by economists polled by Mint.
Experts said that the Fed rate cut raises the probability of a rate cut by the RBI’s monetary policy committee (MPC) in October.
“Fed rate cuts and lower inflation due to GST cuts increases the odds of RBI rate cut in October 2025,” said Deepak Agarwal, chief investment officer, debt, Kotak Mutual Fund.
The government recently limited the goods and services tax (GST) slabs to 5% and 18% and moved several categories of products to lower rates. It has pegged the revenue shortfall from GST cuts at ₹48,000 crore a year based on 2023-24 consumption data. Finance minister Nirmala Sitharaman told Mint in an interview on 5 September that the expected boost arising from the consumption stimulus will mean that the Centre will retain its budgeted fiscal deficit target of 4.4% this financial year.
According to Madhavi Arora, chief economist, Emkay Global Financial Services, RBI’s focus on one-year ahead inflation seems misplaced amid consistent domestic inflation undershoots in recent months Asia’s disinflationary bias and global growth risks.
“Besides, impending Fed easing could still give more breathing space to the RBI to ease,” said Arora.
How will it impact the rupee?
The Fed rate cut is expected to benefit the rupee on the back of higher expected foreign flows following the rate cut. However, given that a trade deal is still in the works and the continuation of a steep 50% tariff on Indian exports, investors will remain cautious, thus limiting inflows.
The rupee has appreciated in the last three trading sessions and closed at 87.75 against the US dollar on Wednesday. This came on the back of revival in trade talks between the world largest and the fifth largest economy.
Over the past month, the domestic currency has depreciated 41 basis points. Mint reported on 16 September that in a day-long discussion on Tuesday between the American trade team led by chief negotiator Brendan Lynch and Indian officials headed by Rajesh Agarwal, special secretary in the department of commerce, both sides agreed to move the negotiation process from where it had stalled, with the objective of quickly reaching a bilateral trade agreement (BTA).
India currently faces a steep 50% tariff on its exports to the US — a rate matched only by Brazil. In fact, the tariff threat loomed even during the last meeting, forcing the six-member panel to unanimously vote for a status quo on interest rates at 5.5%, despite benign inflation.
How will it impact India’s sovereign bond yields?
Experts said that the Federal Reserve’s 25 bps cut to 4.00-4.25% was widely anticipated, but the projection of another 50 bps easing this year could be far more important for India.
Venkatakrishnan Srinivasan, founder and managing partner at Rockfort Fincap LLP, said bond yields are unlikely to see any sharp movement immediately, with changes limited to 2–3 bps.
If US yields trend lower, the spread between the 10-year G-Sec and the US 10-year Treasury — already around 240 bps — will widen further, supporting incremental FPI inflows into government bonds, he said.
The 10-year sovereign bond yield stood at 6.47% on Wednesday, softening about 2 bps in the past month. The yields had hardened following Prime Minister Narendra Modi’s announcement on 15 August of GST cuts but eased after the GST council meeting later. Srinivasan said that till December with a 25 bps rate cut, 10-year Gsec should trade between 6.25-6.35% and in the very short term the range should be 6.4-6.5%.
According to Srinivasan, the Fed rate cut could provide some relief to India’s large borrowing programme, even as domestic inflation and supply dynamics remain key drivers.
“Cheaper US dollar rates can reduce external funding costs, potentially reopening the overseas bond market (which was very low this year but recent SBI bond issue and the recent Fed rate cut may help other Indian entities to enter this market) for PSUs, banks, and corporates who had delayed issuance.”
