From Wall Street to Dalal Street: Decoding the Fed’s rate cut

The rate cut is the Fed’s first cut since December 2024. Until 17th September 2025, the Federal Open Market Committee (FOMC), led by chair Jerome Powell, had kept the rate unchanged. The committee has also hinted at two more rate cuts this year along with one happening in 2026. But all this depends on the inflation and labor market data.

Key Takeaways

• The Fed rates have been reduced by 25 bps, the new range being 4%-4.25%.
• Cheaper borrowing could boost growth but also lowers deposit returns.
• Indian markets could possibly get short-term momentum.

What is the federal rate? Why were they slashed?

The federal rate is the interest rate at which U.S. banks borrow or loan money to each other overnight. The banks have a mandate to maintain a reserve equal to a certain percentage of their deposits with the Federal Bank. Any amount in excess of their reserve is available for lending to other banks.

The Fed believes cutting down rates would make it cheaper to borrow money, prompting individuals and businesses to borrow money. This can be a factor that stimulates economic growth. Currently the Fed rate has been slashed by 25 basis points, with the range being 4%-4.25%. This cut has been made in the onset of the weakening job market and the inflation being above the targeted 2% rate. Such rate cuts can impact everything from mortgage and credit card interest rates to business investments and the stock market.

Impact

When FOMC lowers the rates, banks pay less to borrow money from each other. In reply to this, banks lower the interest rates on loans and credit cards. This has a ripple effect on borrowing to purchase cars, houses, and other big-ticket items. The stock market might see a rise in stock prices due to the lowered rate. All this will have a combined effect on the economic growth. With borrowing costs getting lowered, consumers will have the power to buy and invest more.

The downside being, deposit account interest rates will fall, too. So annual percentage yields on deposit products such as FDs, savings, and interest-bearing checking accounts will decline as well.

Impact on the Indian Market

Market experts are of the view that these rate cuts will have a positive effect on the Indian market. Lower borrowing costs might attract FII inflows in the India market given its robust growth and earning visibility. According to Vijay Singh Gour, a fundamental analyst at Miare Asset Sharekhan, the rate cut is factored in. “A dovish tone and more than two rate cuts in CY2025 could result in a weaker US dollar, lower global yields, and a somewhat stronger Indian rupee.” This can potentially reverse significant FII outflows that happened during FY2025 and FY2026 (till now), cheering up the Indian stock market. The recent experiences suggest the US Fed cut will only have a temporary (short-term) effect on the Indian market.

Conclusion

To sum up, Fed rate cuts aim at bringing back the inflation at the targeted level of 2% and supporting growth amid job market pressures. For India it could attract FII inflows, providing a short-term cheer, although its long-term impact would depend on global economic trends.