Why is it that Indian stock, currency and bond traders and investors keenly watch the move by the Federal Reserve Bank in the US? The change in US interest rates has a wider implication on India and different asset classes in India – whichever way the Fed decides to go. Usually, if the US central bank lowers interest rates, it is positive for Indian markets, and vice versa.
Recently, the Federal Open Market Committee (FOMC)'s decision on December 10, 2025, to cut the benchmark interest rate by 25 basis points (bps) to a range of 3.50%-3.75%—the third consecutive reduction in 2025—has several key implications for Indian asset classes.
Foreign Portfolio Investor (FPI) Flows
A continued Fed easing cycle is generally positive for emerging markets like India, as global risk appetite improves. With the Fed easing, the interest rate differential (IRD) between India and the US widens, which makes Indian debt and equity relatively more attractive. The wider IRD, combined with stable domestic inflation expectations, makes Indian debt increasingly appealing, especially in light of India's recent inclusion in global bond indices.
A wider rate differential makes Indian equities more attractive for US and other foreign investors looking for better returns. So far in the current calendar year, foreign portfolio investors pulled out $18.4 billion from Indian equity markets. The latest Fed rate cut is expected to temper the outflow of foreign portfolio investors from the Indian market.
However, the US central bank has signalled limited scope for further near-term easing as policymakers await clearer trends in employment and inflation. This can limit the FPI inflows.
Bond markets
A dovish Fed provides scope for Indian yields to soften or remain anchored. The Fed cut improves the likelihood of the Reserve Bank of India (RBI) turning supportive in 2025-26, particularly given the downward domestic inflation trends.
The reduction in global yields created by the Fed cut creates scope for Indian Government Security (G-Sec) yields to soften or remain anchored. This environment is supportive for long duration and income-oriented strategies.
Indian rupee
Continued cuts or a slower pace of US rate hikes reduce the strength of the dollar (USD), which can help stabilize the Indian Rupee (INR). India's strong external balances—with forex reserves near all-time highs and a moderate Current Account Deficit (CAD)—create a favourable backdrop if the USD softens. A stable rupee also helps moderate India's imported inflation.
Gold and commodities
Fed rate cuts reduce the opportunity cost of holding gold. Historically, gold has shown strong performance in easing cycles as real yields fall. Softer US growth combined with easing monetary policy generally tends to keep commodity prices stable. A stable to lower crude oil price would benefit India's fiscal and inflation dynamics, which supports the RBI in maintaining a neutral or mildly accommodative stance.