The US Federal Reserve delivered its third interest rate cut of the year, reducing the federal funds rate by 25 basis points and bringing it into the 3.5–3.75% range.
The move immediately became the biggest headline in US rate cut news, with markets asking what the shift means for inflation, growth, the dollar and emerging markets like India.
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WHY THE FED MOVED AGAIN
Subho Moulik, CEO of Appreciate, says the Fed is still navigating a delicate soft-landing attempt. “Core PCE is at 2.8% yoy, the labour market is gradually cooling, and the unemployment rate rose to 4.4%,” he noted, adding that employment gains have slowed to around 110,000–120,000 a month.
According to him, the latest Federal Reserve interest rate cut is the final move in a three-step cycle that began in September. With rates now near neutral, Moulik expects US Treasury yields to stabilise.
“Even US Treasury yields (10Y) are likely to stabilise around 4%, which is approximately 10% in INR terms in one of the lowest-risk asset classes,” he said.
However, he also highlighted that the Fed has signalled a tougher road ahead for further cuts, with only one to two rate reductions expected in 2026, depending on inflation and labour-market trends.
Nachiketa Sawrikar, Boston-based fund manager of the Rs 900 crore Artha Global Multiplier Fund, points out that the Fed has now cut rates by 75 bps between September and December 2025, following a 100 bps reduction in late 2024.
With the federal funds rate now at 3.625%, he says policy is “very close to the estimated neutral rate of 3.25%.”
But the outlook remains uncertain. “The Fed’s dot plot indicates just one additional rate cut in 2026 and one more in 2027,” he said, noting that much will depend on whether inflation can fall sustainably from 3% toward the 2% target without further deterioration in job growth.
Sawrikar warned that such uncertainty is weighing on markets. “Higher long-term rates and unclear policy expectations have weighed on asset valuations and heightened volatility across rate-sensitive sectors,” he said. The rise in the 10-year Treasury yield to 4.16% captures that nervousness.
For emerging markets, the assessment is more sobering. “All this policy uncertainty is negative for emerging markets,” Sawrikar said, adding that India is facing additional pressure because the India–US trade deal has not yet been finalised.
This has put “downward pressure on the rupee–dollar exchange rate,” which could slow foreign inflows and affect domestic equity valuations.
RISKS REMAIN
Rajesh Palviya, SVP – Research at Axis Securities, notes that the Fed’s message signals a shift in priorities. “Concerns over slowing growth and labour-market softness now outweigh earlier fears of persistent inflation,” he said. The cut takes the policy rate to its lowest point in over three years.
According to Palviya, for global equities the latest US Fed news is broadly supportive. “Lower yields typically lift risk appetite and favour both growth and cyclical assets,” he explained. For India, a more accommodative Fed “eases worries around dollar strength and capital outflows,” providing a constructive backdrop for the rupee and domestic liquidity.
He believes buying interest in financials, consumption and select rate-sensitive sectors should remain resilient, even though phases of volatility may persist due to uncertainty over the 2026 policy path.
BOND PURCHASE SURPRISE ADDS A NEW TWIST
The bigger surprise, according to TrustLine Holdings CEO N. ArunaGiri, wasn’t the 25 bps cut but the Fed’s unexpected support program. “Against market expectations of USD 15 billion purchase, the Fed has committed to nearly USD 40 billion, and that too with immediate effect,” he said, calling it a “materially positive development” for short-term yields.
He also highlighted the Fed’s constructive upgrade of 2026 GDP growth projections by half a percentage point.
Even so, ArunaGiri cautions that the “trajectory of further rate cuts remains uncertain,” with the Fed signalling that it will rely more heavily on incoming data rather than any preset easing bias.
WHAT THIS MEANS FOR INDIAN INVESTORS
Moulik stresses that US equities still offer unmatched structural opportunities. “The global AI infrastructure, energy transition, biotech, cybersecurity, and consumer platforms with worldwide moats that the US market provides is hard to match,” he said.
A balanced allocation to US large caps and AI-adjacent themes, he argues, can offset currency and policy risks while tapping into global growth.
He also underlines a long-term trend Indian investors are increasingly aware of: “The INR depreciation trend vs the dollar means US assets could be a long-term hedge against wealth erosion, especially for future US-linked costs like education, travel and global consumption.”
Meanwhile, Sawrikar notes that the rupee could stay under pressure in the near term due to both global policy uncertainty and India–US trade deal delays. That may keep foreign investor flows subdued, even if India’s long-term growth outlook remains strong.
– Ends
