Fed Cuts Rates for Second Time: What It Means for India and Will RBI Follow Suit?

Fed Delivers Second Consecutive Rate Cut

The US Federal Reserve cut its benchmark interest rate by 25 basis points at its October 29, 2025 meeting, bringing the federal funds target range down to 3.75 per cent–4.00 per cent. This marks the second straight policy meeting featuring a rate cut, reflecting the Fed's evolving response to a weakening labour market, persistent inflation concerns, and operational challenges posed by the US government shutdown, which has delayed the release of key economic data.

The FOMC voted 10–2 in favour of the cut, with dissent highlighting divisions within the committee. Some officials preferred a larger decrease, while others wanted rates to hold steady. The decision signals a clear shift in the Fed's focus towards countering employment risks, even as inflation remains above the 2 per cent target. Fed Chair Jerome Powell emphasised that further rate adjustments would be highly data-dependent, given the elevated uncertainty in the economic outlook.

The rate cut was primarily motivated by signs of slowing job gains and a modest uptick in unemployment since the start of the year. Inflation has picked up in recent months, but came in softer than expected in September's CPI readings. The ongoing government shutdown has further complicated decision-making by hampering access to official labour market statistics, forcing policymakers to rely on private-sector indicators that also point to weaker hiring momentum.

Financial markets reacted with measured optimism. US bond yields remained largely stable after the announcement, as investors awaited more clarity on the Fed's rate path. The cut is expected to gradually lower borrowing costs for businesses and consumers, with mortgage rates already slipping slightly. The Committee also announced it would end its securities holding reductions on December 1, 2025, signalling a more accommodative stance going forward.

Don't Expect More Cuts Anytime Soon

Despite delivering back-to-back cuts, the Federal Reserve has significantly dialled back expectations for additional rate reductions in the near term. Chair Jerome Powell made it clear that a December cut is “not a foregone conclusion, far from it,” stressing that future moves will be highly data-dependent. While markets had initially priced in a high probability of further easing, Powell's cautious tone has tempered those expectations.

The FOMC remains divided. September’s “dot plot” showed a median expectation for two more cuts before end-2025, but individual projections varied widely. This internal disagreement reflects the broader uncertainty surrounding the economic outlook, particularly as key government statistics remain disrupted by the federal shutdown.

Analyst consensus has now shifted. Major institutions like Goldman Sachs expect the Fed to hold rates steady for the remainder of 2025, with a reassessment likely in early 2026 if inflation continues to ease. The baseline scenario no longer assumes a December rate cut, instead pointing to a patient approach as the Fed monitors incoming data on employment, inflation, and growth.

What the Fed Cut Means for India

The US Federal Reserve’s rate cut has significant implications for India across multiple dimensions: capital flows, currency movements, monetary policy, and sectoral performance.

Foreign Investment and Market Impact:

The Fed’s easing typically leads to cheaper global liquidity and a softer US dollar, making emerging markets like India more attractive to foreign investors. The Indian stock market can expect increased foreign portfolio inflows into equities and bonds. Lower US rates reduce the opportunity cost of investing in emerging markets, potentially bringing fresh capital into Indian assets.

Rupee and Currency Dynamics:

A weakening dollar due to the Fed cut tends to support the Indian rupee’s appreciation against the greenback, making imports cheaper for India, particularly beneficial given the country’s significant crude oil imports. However, a stronger rupee can also make Indian exports less competitive internationally, creating mixed effects for trade-dependent sectors. The Reserve Bank of India typically intervenes to manage excessive rupee volatility, ensuring currency stability while allowing gradual adjustments.

Sectoral Implications:

Lower US rates and stronger foreign investor interest are expected to benefit sectors like infrastructure, metals, real estate, and financials through increased capital availability and softer borrowing costs. However, export-reliant sectors such as IT, pharmaceuticals, and textiles may face headwinds from rupee appreciation, which makes their products more expensive in foreign currency terms.

Will the RBI Follow with a Rate Cut?

The Reserve Bank of India is widely expected to consider a rate cut in its upcoming December 2025 policy meeting. While the RBI has maintained a cautious stance recently—holding rates steady at 5.50 per cent in both August and September after cutting by 100 basis points earlier in the year—the Fed’s easing has provided additional space for the RBI to act.

Several factors support the case for an RBI rate cut. Domestic inflation has remained well below the RBI’s 4 per cent target, with headline CPI projected at just 3.1 per cent for FY26, providing comfortable room for policy easing. GDP growth, while stable at an estimated 6.5 per cent, faces downside risks from external headwinds, including US tariffs and weak global demand. The impact of earlier rate cuts and liquidity measures is still filtering through the financial system, but credit growth has been sluggish, particularly in retail and MSME segments.

Market experts suggest the RBI will deliver an “insurance” rate cut in December to cushion against external shocks such as global trade uncertainties and geopolitical tensions. This would likely be a modest 25 basis point reduction, bringing the repo rate to 5.25 per cent. However, the decision will depend heavily on incoming data on inflation, growth momentum, and the evolving global environment, particularly developments around US–India trade negotiations and currency stability.

The RBI Governor’s previous commentary has hinted at a dovish pause but signalled readiness to resume the easing cycle when conditions warrant. The central bank aims to revive credit flow, support domestic growth, and manage global externalities without unduly risking inflation. With the US Fed having set the stage for global monetary easing and domestic conditions remaining favourable, the probability of an RBI rate cut in December appears high, though not certain. Policymakers will carefully balance growth support with inflation control while taking cues from both global monetary policy shifts and domestic economic indicators as they make their final call.