US Federal Reserve cuts interest rate by 25 bps; here is how it will impact Indian markets

The US Federal Reserve reduced interest rates by 25 basis points (bps) on Wednesday for the first time since December and indicated that more cuts would follow as the US economy continues to grapple with weak labour market conditions. The US central bank cut the interest rate to the 4-4.25% range.

The latest employment data for August showed that only 22,000 new jobs were added to the economy, as compared to 73,000 jobs added in July.

Fed Chair Jerome Powell indicated that more cuts would follow at meetings in October and December, stating that the softening job market was now top of mind for him and his fellow policymakers.

Here is how the US Fed rate cut will impact Indian markets

Indian equity markets, along with their Asian peers, gave a thumbs up to the US Fed's rate cut. The SENSEX rose as much as 448 points, and the NIFTY50 index touched an intraday high of 25,448.

Japan’s Nikkei 225 rose 1.3% to 45,362.70, South Korea’s Kospi added nearly 1.2%, Hong Kong’s Hang Seng slipped 0.2% and Shanghai Composite gave up early gains to trade 0.6% lower.

Overnight, US markets closed mixed on Wednesday, with NASDAQ and S&P500 ending red with minor losses. While Dow Jones is closed 260 points higher. The US markets have seen a robust rally in 2025, as buoyant investor sentiment around AI stocks overshadowed the weak macroeconomic data.

A cut in the US Fed funds rate will make emerging markets such as India attractive for global investors as they will likely move funds from the US treasury bonds to emerging markets, which are currently trading at attractive valuations, analysts said.

When US interest rates fall, bond yields in the US decline, prompting global investors to look for higher returns elsewhere.

On the currency front, a weaker US dollar after a Fed rate cut usually strengthens the Indian rupee. A stronger rupee will benefit sectors dependent on imports like oil marketing companies and aviation, but it can hurt IT and pharma companies as they earn significant revenues in US dollars.

With cheaper liquidity worldwide, Indian companies with overseas borrowings can benefit as refinancing costs fall.

A rate cut by the Fed often supports gold and oil prices as liquidity rises and inflation expectations increase. A rate cut signals a pro-growth stance by the Fed. This raises global risk appetite, lifting flows into equities. Indian equity valuations, currently attractive after correction, could attract foreign institutional investors (FIIs), analysts noted.