As the US Federal Reserve (the Fed) concludes its December 2025 meeting, the question on everyone's mind is: Will a 25 basis points (bps) rate cut help stabilize the Indian Rupee (INR)? The outcome of this meeting is poised to influence market sentiment as we head into 2026.
Likelihood of a Rate Cut
Market expectations strongly favor a 25 bps rate cut. According to the CME FedWatch Tool, there's an approximately 87% probability of such a reduction. This anticipated move follows similar cuts in September and October, bringing borrowing costs to their lowest levels since 2022.
Potential Impact on the Indian Rupee
A US Fed rate cut typically weakens the US dollar. This is because lower interest rates make dollar-denominated assets less attractive to global investors, prompting them to seek higher returns in emerging markets like India. Increased foreign capital inflows into Indian equities can then push stock prices higher as demand for Indian stocks rises.
Specifically, a 25 bps rate cut could ease depreciation pressures on the Indian Rupee by narrowing the interest rate differential, thereby improving foreign capital flows into emerging markets. Some experts believe that a likely 25-basis-point cut would ease US bond yields and widen the yield spread for Indian bonds, which historically tends to tilt capital flows toward emerging markets such as India.
RBI Intervention
The Reserve Bank of India (RBI) might step in to manage the Rupee's exchange rate. If the Rupee appreciates too rapidly, the RBI may sell dollars to prevent excessive appreciation.
Expert Opinions and Market Outlook
However, some experts believe that a rate cut is fairly discounted, and the market may see a limited impact of the policy move. According to Anindya Banerjee, the head of currency and commodity at Kotak Securities, a 25 bps rate cut is already fully priced in by global markets; the real catalyst will be the tone and forward guidance. "A dovish pivot strengthens the rupee; a hawkish tone pressures it. In the near term, USD-INR is likely to trade within a broad 89.50–91.00 range. The directional breakout will depend entirely on the Fed's guidance, not the 25 bps cut itself," said Banerjee.
Ravi Singh, Chief Research Officer from Master Capital Services, noted that while a 25-basis-point cut would ease US bond yields and widen the yield spread for Indian bonds, the ultimate reaction will depend not only on the rate change but also on the Fed's forward guidance.
Broader Economic Implications
A weaker dollar, resulting from the rate cut, could have mixed effects on Indian trade. While it makes imports cheaper, potentially reducing imported inflation, it can also make Indian exports more expensive for foreign buyers.
Alternative Scenarios
If the Fed adopts a hawkish stance or hints at prolonged tight monetary policy, global yields could rise, making US assets more attractive. This could trigger FII outflows from Indian equities, weaken the rupee, and put pressure on sectors dependent on foreign capital.
According to Akshat Garg, Head - Research & Product at Choice Wealth, with the Fed widely expected to deliver a small cut amid a divided committee, the real market driver will be Powell's message on inflation and growth rather than the rate move itself.
Conclusion
While a 25 bps rate cut may offer some stability to the Indian Rupee, its long-term impact hinges on the Fed's forward guidance and overall market sentiment. The interplay of various global and domestic factors will ultimately determine the Rupee's trajectory in the coming months.
