US Fed Meeting: FOMC Cuts Rate by 25 bps, Signals 1 Cut Next Year. How Can It Impact the Indian Stock Market?

The US Federal Reserve's Federal Open Market Committee (FOMC) concluded its December 2025 meeting by cutting the benchmark interest rate by 25 basis points, bringing the federal funds rate to a range of 3.50%–3.75%. This marks the third consecutive rate cut in 2025, following similar reductions in September and October. This decision, while widely anticipated, arrives amidst concerns about elevated inflation and a slowing job market in the US.

The Rationale Behind the Cut

The FOMC's decision reflects a balancing act between supporting a moderating labor market and addressing inflation that remains above the Fed's 2% target. According to the FOMC statement on December 10, 2025, "Job gains have slowed this year, and the unemployment rate has edged up through September. More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated". Despite these concerns, the Fed anticipates that the rate cuts will help stabilize the labor market while allowing inflation to gradually return to its desired level.

Dot Plot Divergence and Future Rate Path

While the rate cut itself was largely expected, the "dot plot," which represents individual FOMC members' projections for future interest rate levels, revealed a striking divergence of opinions. While the median projection indicates only one 25 bps rate cut in 2026, some policymakers anticipate two cuts, while others foresee even more. This divergence underscores the uncertainty surrounding the economic outlook and the Fed's future policy decisions, which will heavily rely on incoming economic data.

Impact on the Indian Stock Market

Historically, a US Fed rate cut is seen as a positive sign for emerging markets like India. Lower US interest rates typically reduce the attractiveness of US debt, prompting global investors to seek higher-yielding assets in emerging economies. This can lead to increased foreign investment in Indian equities and bonds, strengthening the Indian rupee and boosting equity valuations.

However, the relationship between US Fed rate cuts and the Indian stock market isn't always straightforward. Some analysts believe that the impact of individual rate cuts is minimal, and the cumulative effect of multiple cuts is more significant. Others point out that the correlation between the US and Indian markets is not consistently strong and can be influenced by various global and domestic factors.

Potential Scenarios and Market Reactions

• Positive Scenario: A US Fed rate cut, especially if accompanied by dovish commentary suggesting further easing, could trigger a "risk-on" sentiment in the Indian stock market. Sectors highly dependent on foreign inflows and liquidity, such as IT, banking, and real estate, may experience a rapid increase in value. The Indian rupee could strengthen against the dollar, further attracting foreign investment.
• Cautious Scenario: If the Fed's rate cut is perceived as a precautionary measure due to economic weakness rather than a sign of confidence, the initial relief rally in the Indian market may be short-lived. Investors may become concerned about the underlying economic conditions and adopt a more cautious approach.
• Negative Scenario: If the Fed signals a prolonged period of tight monetary policy despite the rate cut, foreign institutional investors (FIIs) may continue to pull out of Indian markets, leading to a weaker rupee and pressure on sectors dependent on foreign capital.

Expert Opinions

Jeffrey Roach, Chief Economist for LPL Financial, suggests that the Fed may remain on hold in the first quarter of next year, especially if the economy responds to fiscal and policy support. He anticipates the first rate cut in the second quarter of 2026. Ross Maxwell, Global Strategy Operations Lead at VT Markets, anticipates a positive impact on Indian markets, with FII trends potentially reversing due to the rate cut. However, he cautions against a scenario where the Fed hints at prolonged tight monetary policy, which could trigger FII outflows and weaken the INR.

Conclusion

The US Fed's decision to cut interest rates is a significant development with potential implications for the Indian stock market. While the rate cut itself may provide some initial boost to market sentiment, the actual impact will depend on various factors, including the Fed's future policy decisions, the strength of the US economy, and global market conditions. Investors should carefully monitor these developments and adjust their strategies accordingly.