What US Fed Rate Cut Means For India Stock, Debt, Gold Markets

The US Federal Reserve's rate-setting panel, the Federal Open Market Committee (FOMC), lowered the benchmark interest rates for the first time in 2025, citing weak labour market conditions. The 12-member FOMC led by Fed Chair Jerome Powell also signalled a dovish outlook, acknowledging that two more rate cuts are likely by the end of the current calendar year, in October and December.

The rate cut is in alignment with US President Donald Trump's policy goals, however, it is still less aggressive than the bigger cuts he has been calling for.

In an 11-to-1 vote, the FOMC lowered its benchmark overnight lending rate by 25 basis points (bps) to a range between 4.00-4.25 per cent. Governor Stephen Miran was the only dissenter as he vouched for a larger 50 bps cut.

After the conclusion of the FOMC meeting, Fed Chair Powell said President Trump's tariffs are making their presence felt; however, the "overall effects on economic activity and inflation remain to be seen."

On labour market, Powell said, lower immigration is creating a bigger impact than tariffs. "There's very little growth, if any, in the supply of workers," he said.

On the housing market, the Fed Chair said the 25 bps cut might not be enough to create a huge impact. He said, "Most analysts think it would have to be pretty big change in rates to matter a lot for the housing sector."

Powell also added that a 25 bps rate cut "won't make a big difference to the economy." He added, however, that this does not mean more cuts are guaranteed, saying, "We are not on a pre-set path."

Following the rate cut, US equities closed on a mixed not, with Dow Jones closing higher by 0.57 per cent, and Nasdaq closing 0.33 per cent down and S&P 500 ending almost unchanged. Gold rates fell internationally and domestically, US bond yields declined, while US dollar (USD) strengthened.

What the US Fed Rate Cut Means For India's Markets

Equity Market: Domestic equity benchmark indices started higher on September 18, after the US Fed's rate cut announcement. The BSE Sensex surged as much as 447.50 points, or 0.54 per cent to hit an intraday high at 83,141.21. Likewise, the NSE Nifty 50 climbed up to 118.70 points, or 0.47 per cent to touch an intraday high of 25,448.95.

At close, Sensex was at 83,013.96, up 320.25 points, or 0.39 per cent, and Nifty 50 was at 25,423.60, up 93.35 points, or 0.37.

Ajit Mishra, senior vice president, research, Religare Broking, told Outlook Money: "The Fed's 25 bps rate cut was widely anticipated, and the dot plot signaling two more cuts in FY25 also aligned with market expectations. Alongside this, the Fed reiterated that inflation remains a concern, reflecting a balanced risk-management stance while shifting focus toward supporting growth."

Adding further, Mishra said, "Since these developments were largely in line with market pricing, Indian equities are unlikely to witness sharp near-term swings, neither on the downside nor a strong rally."

However, he said that the broader easing cycle is constructive for risky assets, including emerging markets like India. "If incoming US data continues to validate a soft-landing trajectory, foreign institutional investor (FII) inflows should gradually strengthen, supporting Indian equities in the medium term," Mishra added.

Mirroring Mishra's views, Dhiraj Relli, managing director and CEO, HDFC Securities, said the rate cut will make emerging markets like India more attractive for "yield-seeking investors," which could potentially increase capital inflows.

On the contrary, VK Vijayakumar, chief investment strategist at Geojit Investments, thinks the Indian stock market is unlikely to be impacted by the Fed's decision, saying, "The ongoing rally in the market is driven by expectations of earnings revival and a positive outcome from the India-US trade negotiations."

Debt Market: For the Debt market, the US Fed's rate cut paves the way for the Reserve Bank of India (RBI) to cut domestic interest rates. "This clearly paves the way for RBI also to move to cut rates given the slowdown in credit off take and to spur growth in the economy," says Vishal Goenka, Co-Founder, IndiaBonds.

Domestic bonds yields rose on September 18, with the benchmark 10-year bond yield surging by 4 bps to 6.50 per cent, as of 3:15 PM.

Goenka says that bond yields in India are likely to decline from here as more rate cuts are telegraphed in US until December which gives room for other global central banks including RBI to follow a similar path.

However, adding further, he says, "Allocations to India by foreign investors is bound to increase due to recent upgrade by S&P and also funding becomes cheaper in USD for global deployment post Fed rate cut."

Gold: ⁠Gold prices tumbled in early trade on September 18 as the USD strengthened post the US Fed rate cut.

On the Multi Commodity Exchange (MCX), October Gold futures dipped by as much as Rs 1,132, or 1.03 per cent, to an intraday low of Rs 1,08,690 per 10 grams. At 3:15 PM, it traded almost flat at Rs 1,09,768 per 10 grams, down by Rs 54, or 0.05 per cent.

On COMEX, December Gold futures tumbled up to $50.50, or 1.36 per cent, to touch intraday low of $3,667.30 per ounce. Around the same time, the contract traded at $3,705.70 per ounce, down by $12.10, or 0.33 per cent.

Prathamesh Mallya, DVP Research - Non Agri Commodities and Currencies at Angel One, says, Gold prices already factored in the 25 bps rate cut prior to the FOMC meeting, and reached record highs as markets were already expecting this decision.

Now, Mallya sees a likely correction in the coming fortnight. "COMEX gold might move lower towards $3500 per ounce while MCX gold futures might move lower towards Rs 1,05,000 per 10 grams," he speculates.

INR vs USD: Following the US Fed's rate cut, the Indian Rupee (INR) opened 15 paise weaker at 87.97 against the USD on September 18, as against its previous close of 87.82 on September 17.

As of 3:15 PM, INR traded at 88.15 against USD, weaker by 42 paise.

Vijayakumar of Geojit Investments says, "The Fed rate cut by 25 bps was on expected lines and, therefore, was discounted by the market."

"A major drag on the Rupee in recent times has been the sustained selling in the Indian stock market by FIIs which resulted in capital flight from India. If this trend continues, the Rupee will remain weak. India's current account deficit (CAD) is under control and does not warrant further weakening of Rupee," he says.

Further, Vijaylkumar says, "INR has the potential to appreciate if FIIs turn buyers in the Indian market. This can happen in the next couple of months."