India set to attract stronger capital flows as US Fed cuts rates by 25 bps

The Federal Reserve on Wednesday lowered interest rates by 25 basis points (bps) to a 4–4.25% range—the first reduction since December—signalling more cuts in the coming months as the world’s largest economy struggles with weakening job growth and rising unemployment.

While the move highlights stress in the US labour market, it has opened the door for emerging markets such as India to attract stronger foreign capital inflows at a time when domestic fundamentals remain resilient.

The Fed’s policy shift comes after US job growth slowed sharply in August, with just 22,000 jobs added compared to 73,000 in July. The unemployment rate also climbed to a four-year high of 4.3%. Fed Chair Jerome Powell indicated that further cuts in October and December were likely, citing the softening job market as the primary concern.

For global investors, the Fed’s pivot means declining bond yields in the US, which historically pushes capital out of safe-haven assets such as US government bonds and into emerging markets like India. With relatively attractive valuations, India is expected to be a major beneficiary of the rate cut announced by the US Fed, analysts noted.

“India should expect stronger capital inflows—particularly in Q4, when large global asset managers finalise allocations. This comes at a time when the Indian economy is demonstrating resilience, even in the face of global headwinds such as higher tariffs from the US,” said Nachiketa Sawrikar, fund manager at Artha Bharat Global Multiplier Fund.

Indian equity markets reacted positively, with the SENSEX climbing as much as 448 points and NIFTY50 touching an intraday high of 25,448 on Thursday. Analysts said the global liquidity easing and India’s strong macroeconomic fundamentals are likely to attract foreign investors going ahead.

FIIs cannot ignore Indian markets for long, but they will not immediately return to India after the rate cut, says market expert Avinash Gorakshkar.

"Foreign institutional investors cannot ignore Indian markets for long, and with the rate cut by the Fed, they will not immediately return to Indian markets. Fund reversal will take some time to come into effect as market participants are closely watching out for how the tariff situation pans out," Gorakshkar told Upstox news.

"Foreign funds are waiting for certainty around tariffs, as it will be tough for businesses to operate at a 50% import tariff, and once certainty comes, they will definitely come back to Indian markets," he added.

Meanwhile, a weaker dollar post-Fed cut will strengthen the rupee, aiding sectors reliant on imports like oil retailers and aviation. However, IT and pharma firms that earn heavily in US dollars may feel some pressure on margins.