A Rare Synchronised Easing: RBI and US Fed Cut Rates-What It Means for India Now

The first week of December 2025 has delivered two big policy headlines for the financial world. On December 5, the Reserve Bank of India (RBI) cut the repo rate by 25 basis points, citing historically low inflation and strong GDP expansion. Just a few days later, at the December 9–10 meeting, the US Federal Reserve cut its benchmark rate by another 25 bps, bringing the federal funds target range down to 3.50 per cent–3.75 per cent, its third consecutive rate cut of 2025.

For the first time in several years, both central banks have shifted toward a more accommodative stance within the same fortnight. This marks an important moment for investors, borrowers, businesses and global markets. This blog brings both decisions into a single narrative: why they happened, what they mean and how India stands to benefit.

RBI’s 25 bps Cut: India Enters a Soft-Easing Cycle

On December 5, 2025, the RBI reduced the repo rate by 25 basis points (bps) after several months of holding steady. This widely anticipated cut was primarily driven by a unique convergence of favourable macro conditions in India: inflation was at record lows, with CPI inflation in October 2025 around 0.25 per cent, dramatically falling below the RBI's 4 per cent target and even the 2 per cent lower band; simultaneously, GDP growth was exceptionally strong, posting 8.2 per cent in Q2 FY26, marking the fastest pace in six quarters; and finally, credit demand needed a push, as retail and MSME credit growth had been softer than expected, making a small rate cut instrumental in reviving borrowing activity.

Why did the RBI act now?

When inflation is far below target and growth momentum is strong, the cost of cutting rates becomes very low. Moreover, real interest rates (interest rate minus inflation) were too high, which can discourage borrowing and private investment. The 25-bps cut brings down borrowing costs modestly, supports MSMEs and homebuyers, boosts rate-sensitive sectors like real estate and autos and signals that the RBI remains committed to growth stability while controlling inflation. RBI’s message was clear: This is an insurance cut, not the start of an aggressive easing cycle.

The US Federal Reserve Cut: Third Straight Rate Cut in 2025

Just days after the RBI's action, the US Federal Reserve reduced the federal funds rate to a target range of 3.50 per cent–3.75 per cent, marking its third consecutive cut following similar moves in September and October. This decision was primarily motivated by weakening labour market indicators, including slowing job growth and rising unemployment and was complicated by a government shutdown that delayed official economic data. While inflation remained above the target, it was observed to be trending toward the desired level. Although the December rate cut itself was widely anticipated by markets, the Fed's accompanying statement adopted a notably cautious tone, signalling expectations for a slower pace of future rate reductions.

This suggests that the Federal Reserve's path forward is characterised by caution and internal divergence. Officials signalled an expectation of only one additional rate cut in 2026, indicating a slow and measured easing cycle. This cautious outlook is further underscored by a growing division within the Federal Open Market Committee (FOMC), evidenced by three dissents—the highest level since 2019—reflecting significant disagreement on the appropriate policy action. Ultimately, the Fed expressed a desire to avoid easing monetary policy too quickly, even in the face of weakening labour market data. Collectively, these points suggest that while the Fed has initiated its easing cycle, it is highly likely to pause soon to thoroughly evaluate incoming inflation and employment data before committing to further reductions.

Why These Two Decisions Matter Together

For the first time in many years, US and Indian monetary policy cycles are moving in the same direction toward easing. This creates powerful effects across global markets.

A Softer Dollar → Relief for India

A rate cut by the US Federal Reserve typically leads to a weaker dollar and the December reduction specifically offered several favorable outcomes for the Indian economy. The resulting dollar weakness supports a stronger rupee, which, in turn, helps to reduce India’s overall import bill by making dollar-denominated goods less expensive. This effect is particularly significant for commodities, contributing to a lower cost of crude oil imports. Furthermore, a stronger rupee reduces pressure on India's forex reserves by minimising the need for central bank intervention to stabilise the currency. The greater stability of the rupee also works to curb imported inflation, as cheaper imports slow price rises within the domestic economy, ultimately providing the Reserve Bank of India (RBI) with additional scope to maintain an accommodative monetary policy to support growth.

Potential Surge in Foreign Portfolio Inflows

When US yields fall, global investors look for better returns in emerging markets. India, with strong GDP growth, a stable political outlook and the world’s highest household SIP inflows, becomes a natural magnet for foreign capital. Sectors likely to benefit: Banks & Financials, Infrastructure, Real Estate, Metals and Consumption plays.

Lower Borrowing Costs Worldwide

With both the Fed and RBI cutting rates, global borrowing costs begin to ease, corporate capex becomes more attractive, housing demand strengthens and bond yields may soften further. India’s rate-sensitive sectors like autos, real estate and NBFCs stand to benefit the most.

Will the RBI Cut Again Now That the Fed Has Cut?

A big question now is: Does the Fed’s third cut increase the probability of more RBI rate cuts? 

The Reserve Bank of India (RBI) is likely to consider a further rate cut if a specific set of domestic and global economic conditions align: inflation remains below the 2 per cent mark, the country's growth momentum slows modestly, the rupee stays stable against the US dollar and global economic risks begin to rise. However, the RBI has made it clear it will not blindly follow the Federal Reserve's lead, as the economic cycle in India is distinct from that of the US. While the US is primarily cutting rates to combat a weakening labour market, India's easing is fundamentally driven by unusually low domestic inflation. Consequently, the RBI's policy remains highly sensitive to internal risks; should inflation increase due to food or commodity price shocks, the RBI is prepared to pause its easing cycle rather than automatically mirroring the actions of the Fed.

What It Means for Investors in India

The blend of rate cuts and strong GDP growth creates a perfect tailwind for Indian equities, particularly benefiting sectors like Banks, NBFCs, Realty, Autos, Capital Goods and Consumption. In the bond market, lower rates will likely lead to higher bond prices, making it a good time for long-duration debt funds. For the currency, short-term strengthening of the rupee is expected, although the RBI will actively work to prevent excessive appreciation. This environment will also benefit borrowers, as Home loan and car loan EMIs may fall marginally, but will disadvantage savers, who should expect FD rates to start trending down.

The Bigger Strategic Picture

This is the first time in nearly a decade that U.S. inflation is falling, India’s inflation is near zero, Global growth is slowing and both central banks are shifting to easing. It signals a global monetary pivot, very similar to 2015–2016, when synchronised global easing drove a multi-year bull run in emerging markets. India, with the world’s fastest GDP growth, the fastest growing equity market, rapidly rising SIP flows and strong domestic consumption, could be a major beneficiary.

Conclusion

The December moves by the Fed and the RBI together mark the beginning of a more accommodative global liquidity phase. For India, this is a uniquely favourable setup: Ultra-low inflation, Strong GDP growth, rising domestic liquidity (SIPs), Softer dollar, Cheaper borrowing costs and Strong corporate earnings outlook.

While both central banks signalled caution, the direction is clear: We are entering a soft easing cycle globally and India is entering it from a position of strength. For investors, the message is simple: Stay invested, stay diversified and don’t underestimate the power of synchronised rate cuts in a fast-growing economy like India.

Disclaimer: The article is for informational purposes only and not investment advice.