Possibility of RBI rate cuts, increased foreign inflows, and relief for businesses
What Happened in the US
- The US Federal Reserve, led by Jerome Powell, announced its first interest rate cut of 2025, reducing the target range by 25 basis points to 4.00–4.25%.
- Key drivers for the cut include a slowing labor market and increased unemployment risk, though inflation concerns remain.
Possible Effects on Indian Stock Markets
- Room for RBI to follow suit:
Experts suggest that this Fed move may allow the Reserve Bank of India to consider rate cuts later this year, possibly by October 2025, especially given weakening credit demand. - Boost to liquidity & foreign inflows:
A softer US dollar and reduced rates abroad may encourage more foreign investment into Indian equities. - Yield curve and borrowing costs:
India may benefit from easing borrowing costs for businesses if the RBI cuts rates. There’s also discussion about the yield curve in India becoming more favorable.
What Could Limit the Upside
- Transmission lag: Even if RBI reduces rates, the impact might be slow due to banks’ hesitant lending behavior.
- Inflation and macro risks: Core inflation, global supply shocks, fiscal deficits etc., can still pose challenges to sustained gains.
- Global uncertainties: Geopolitical issues, US economic performance, and global capital flows could alter outcomes.
Implications & Outlook
- Indian benchmark indices may find near-term support with easing global borrowing costs.
- Sectors sensitive to interest rates—like real estate, financial services, and consumer durables—could benefit.
- Retail and institutional investors might increasingly look at equities over fixed income or dollar‑denominated assets.
