The US Federal Reserve has made a pivotal decision to lower the benchmark interest rate by 25 basis points, reducing the federal funds rate to a range of 4 percent to 4.25 percent. This move, confirmed on September 17, comes as the labour market shows signs of increasing stress. The Federal Open Market Committee (FOMC) reached this decision with an 11-1 majority vote, indicating broad support for the rate cut.
Fed Chair Jerome Powell highlighted that this decision aligns well with predominant expectations and hinted at the possibility of further rate easing in the upcoming months. However, he underscored that any future policy changes would depend on incoming data and evolving economic conditions. “The median participant projects that the appropriate level of the federal funds rate will be 3.6 percent at the end of this year, and further declines to 3.4 percent in 2026 and 3.1 percent in 2027,” Powell stated, noting that these projections reflected a downward revision of 25 basis points compared to those made in June. He cautioned that these forecasts are laden with uncertainty and should not be seen as a preset course of action.
The Fed’s mixed signals stirred volatility in the US markets, with the Dow Jones Industrial Average experiencing a significant rise of around 500 points before regaining stability. Despite this, experts believe that the implications of the 25 basis point rate cut on the Indian stock market would be minimal, as the announcement had been largely anticipated.
Market analysts suggested that while a 25 basis point reduction might not substantially influence Indian equities, a more aggressive cumulative rate cut of 50 basis points or more could yield positive outcomes. “A cumulative 75-100 basis points reduction would favor emerging markets like India, easing US dollar strength and bond yields, which may attract foreign investment,” explained Ajit Mishra, SVP of research at Religare Broking.
Key stocks in sectors such as IT, banking, and finance — including TCS, HCL Tech, Infosys, and HDFC Bank — are anticipated to react in the wake of the Fed’s decision. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, referred to the cut as a “risk management cut,” emphasizing the Fed’s focus on addressing potential risks tied to persistent inflation.
The market outlook suggests that while the Fed indicated the possibility of additional rate cuts later this year, the recent decision did not elicit a significant market reaction. Currently, sentiment in the Indian market is buoyed by expectations surrounding a potential India-US trade agreement and optimism regarding government reforms, particularly related to GST.
Furthermore, according to Madhavi Arora, Chief Economist at Emkay Global Financial Services, a more accommodating stance from the US central bank could provide greater flexibility for central banks in emerging markets, including the Reserve Bank of India (RBI), to either maintain or relax their own policy measures.
The Federal Reserve now faces a delicate balancing act, navigating the pressures of controlling inflation while fostering economic growth, indicating that future policy decisions will be critically important in shaping both US and global economic landscapes.
