New Delhi [India] December 11 : The US Federal Reserve ended the year with its third consecutive interest rate cut, lowering the federal funds rate to 3.50%-3.75%.
The move to bring cumulative cuts in 2025 to 75 basis points comes amid persistent weakness in labour market indicators and continued uncertainty caused by the US government shutdown, which has restricted the flow of fresh economic data.
For India, the Fed's stance carries important implications, particularly in the context of currency volatility and interest-rate differentials.
The BoB Economist Dipanwita Mazumdar expected India's Reserve Bank of India (RBI) to settle at 5% repo rate in the Calendar Year 2026.
"If we go by the Fed fund rate long-term projections, there is expectation of another 25bps cut in CY26 and we expect terminal rate of RBI to settle at 5% at around the same time. Thus, convergence to mean reversions levels might see deferment in the near term and policy differential will be largely maintained at this level," she highlighted.
"The policy rate differential between India and US has largely been contained due to sharper pace of rate cut by RBI compared to the US. The yield differential has also mirrored the same trend as policy rate differential. This was supportive of FPI flows in the initial months," said Mazumdar.
"However, the volatility of rupee currently has had an impact on flows of late. Going forward, we expect the policy rate differential between India and US to be maintained at the current level," she added.
The report further said the higher yield differential between India and US in the near term will be supportive of FPI flows and hence is expected to provide currency some support. Inflation differential will also be tilted in favour of India as domestic food prices are largely contained.
The Reserve Bank of India (RBI) l;ast week reduced the repo rate to 5.25% from earlier 5.50%, with the Monetary Policy Committee (MPC) voting unanimously in favour while retaining a neutral stance.
The cash reserve ratio (CRR) remains unchanged at 3%, and the standing facility rate has been lowered to 5% from 5.25%.
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