Recently, the US Federal Reserve lowered the benchmark interest rate range by 25 basis points to 4–4.25%, marking its first rate cut after nine months of holding steady.

Reasons for Rate Cut: Balancing dual mandate of the Fed, price stability and maximum employment.

• Weakening Labour Market:
  • Non-farm payroll employment rose by just 22,000 in August, below expectations.
  • Fed noted “job gains have slowed” and unemployment is edging up, raising downside risks to employment.
• Inflation Pressures:
  • Inflation (PCE index) increased from 2.2% in April to 2.6% in July.

• • 2025 inflation forecast unchanged at 3%.
  • 2026 forecast revised upward to 2.6% (from 2.4%).
  • Inflation expected to reach 2% target only by 2028.

Impact of US Fed Rate Cuts on the Indian Economy

• Capital Flows: Lower US rates make India attractive for investors, likely increasing FPI inflows into equities and debt, improving market liquidity and easing bond yields.
• Rupee and Exchange Rate: A weaker dollar and stronger capital inflows may cause the rupee to appreciate, though this can hurt exports.
• Inflation Effects: A soft dollar can reduce imported inflation (cheaper crude and commodities), but higher liquidity from inflows may create inflationary pressures domestically.
• Exports and IT Sector: A stronger rupee reduces competitiveness of exports and affects IT revenues earned in dollars, though global trade revival from looser monetary policy may offset some impact.
• Wider Macro Impact: Lower global credit costs reduce India’s external borrowing burden, encourage corporate fundraising abroad, and boost investor confidence in India’s growth story.

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