Fed’s rate cut brings relief, but signals a cautious road ahead

By Vriti Gothi

The US Federal Reserve’s decision to cut its benchmark interest rate by 25 basis points, bringing it to a range between 3.75% and 4.00%, has stirred cautious optimism across global markets, including India. The move, though widely anticipated, follows concerns around short-term funding stress among select US banks and comes amid the ongoing government shutdown that has restricted the availability of key economic data.

The rate cut decision was not unanimous, with one FOMC member advocating a deeper 50 bps reduction while another voted to keep rates unchanged. Despite the easing, US Treasury yields edged higher after Fed Chair Jerome Powell cautioned that another rate cut in December was “not a foregone conclusion,” signalling a more guarded policy stance amid economic uncertainty.

Naval Kagalwala, COO & Head of Products at Shriram Wealth Ltd, said, “The policy easing was broadly in line with expectations but reflected the Fed’s cautious tone. The FOMC cut its benchmark rate by 25 bps while also pulling back from its quantitative tightening programme following concerns around short-term funding for select banks. However, treasury yields edged higher after Chair Powell noted that a further reduction in interest rate in the upcoming meeting in December was not a foregone conclusion,” he said. “From the Indian bond markets’ perspective, focus now shifts to trade negotiations between India and the US, the extent of INR depreciation, and the RBI’s liquidity management approach, especially given growing talks of possible OMO purchases to support yield curve movement and deposit growth.”

Vishal Goenka, Co-Founder of IndiaBonds.com, said, “The Fed’s move sets the stage for similar action by the Reserve Bank of India. The US Fed cut benchmark overnight rates by 25bps as expected. However, Governor Powell very distinctly highlighted that any further cuts in the next December meeting are not a done deal. This is a clear green light for the RBI to cut the repo rate in its next meeting in early December,” Goenka said. “With the US cutting rates, we expect the RBI to move in the same direction. Long-end government bonds look attractive, as proper transmission of earlier rate cuts requires a flatter and lower yield curve.”

With the Fed signalling caution after this round of easing, the focus now turns to the RBI’s upcoming policy review in December. Analysts expect the central bank to maintain a supportive stance amid moderating inflation and slowing global growth. The RBI’s liquidity operations, including potential Open Market Operations (OMOs), will be closely watched as they could influence bank deposit growth and yield curve dynamics.

As global monetary policy enters a phase of measured easing, Indian investors and financial institutions are recalibrating their strategies to balance global cues with domestic fiscal realities.