The US Federal Reserve closed the year with its third straight rate cut, trimming the federal funds rate to 3.50%–3.75%. With this move, total cuts in 2025 now stand at 75 basis points, signalling the Fed’s attempt to steady the economy amid a weakening labour market and limited data releases caused by the prolonged US government shutdown.
Why The Fed’s Move Matters for India
For India, the Fed’s policy direction holds significant importance, especially in relation to currency stability, foreign investor flows, and interest-rate differentials.
Bank of Baroda economist Dipanwita Mazumdar noted that India’s RBI is expected to reach a terminal repo rate of 5% in 2026, broadly aligning with the Fed’s long-term projections of an additional 25 bps cut next year. She added that while mean reversion may be delayed, the India–US rate gap is likely to remain steady.
Currency Volatility And FPI Flows Under Watch
Mazumdar explained that the narrowing of the India–US policy rate differential earlier in the year, helped by quicker RBI cuts, had boosted FPI flows. However, recent volatility in the rupee has tempered these inflows. Even so, she expects the differential to stabilise at current levels, supporting foreign participation going forward.
The report also highlighted that a wider yield differential between India and the US in the near term should attract more FPIs and lend some support to the rupee. Additionally, India’s inflation outlook remains favourable, with domestic food prices broadly contained, giving the country an edge on the inflation differential front.
RBI Policy Moves Back Home
Last week, the RBI cut the repo rate to 5.25% from 5.50%, with the Monetary Policy Committee voting unanimously while maintaining a neutral stance. The CRR remains at 3%, and the standing facility rate has been reduced to 5% from 5.25%.
(This Is Syndicated From ANI)
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