FOMC rate cut gives RBI MPC further room, but policy action seen hinging on growth-inflation outlook

Reserve Bank of India

US Federal Reserve’s by 25 bps rate cut has increased the scope for policy flexibility for emerging markets like India, however, economists believe the Reserve Bank of India (RBI) will keep its focus on growth and inflation in framing the policy stance at the upcoming December monetary policy meeting.

Jerome Powell’s second straight interest rate cut was widely anticipated, and came with a signal of an end to quantitative tightening (QT), the liquidity-draining measure that had begun in 2022. The Federal Reserve said that while the US economic activity continues to expand at a “moderate pace”, inflation remains somewhat elevated and job gains have slowed. The shift in tone was interpreted by some market participants as an attempt to support growth amid rising global uncertainty.

For India, however, the implications are more nuanced. According to Gaura Sen Gupta, economist at IDFC First Bank, the RBI’s policy remains primarily influenced by domestic macroeconomic conditions rather than global factors. “The lower Fed policy rate creates further degrees of freedom for the RBI, but the primary factor for policy direction will continue to be growth and inflation dynamics,” she added.

Sen Gupta added that the central bank’s reaction could take a cue from India’s ongoing trade negotiations with the United States. “If India successfully reaches a trade deal with the US, the RBI is likely to stay on pause.” She also highlighted that the pace of RBI’s monetary easing would depend on inflation undershooting the 4 percent target, and GDP growth staying below the 7 percent. “Growth indicators are showing a pickup in Q2FY26, particularly with a recovery in rural demand. Manufacturing and services production are also improving, and the recent GST cut is expected to bolster urban consumption in Q3FY26,” she added.

Aditi Gupta, economist at Bank of Baroda said while the Fed’s move provides comfort, it will not sway RBI’s decision. “The RBI has always maintained that its policy is guided by domestic macroeconomic factors and not by the stance of other central banks. Hence, we do not expect the Fed’s rate cut to have a direct impact on the December 2025 policy outcome,” she said.

However, the Bank of Baroda economist said that the rate differential between India and the US would be a relevant consideration, especially for capital flows. “A narrower interest rate gap could affect foreign portfolio inflows. The RBI will stay cognizant of this factor even as it prioritises domestic stability,” Aditi Gupta added. She too believes that India’s evolving growth-inflation dynamics will be key to the next MPC review.

“While inflation is likely to stay within the comfort band, the Q2FY26 GDP data will be a crucial monitorable. High-frequency indicators especially those reflecting consumer spending will also be closely tracked before the RBI decides on further rate cuts,” Aditi Gupta said.

From the bond market perspective, the Fed rate cut is widely perceived as a green light for domestic easing. Vishal Goenka, co-founder of IndiaBonds.com said the FOMC action reinforces expectations that the RBI could reduce repo rate in its upcoming policy review.

“The last policy was described as a dovish pause, and that helped contain long-end government yields. With the Fed moving toward easier policy, the RBI now has space to follow suit. A flatter and lower long-end yield curve is essential for better transmission of previous rate cuts across the banking system,” Goenka said. He also added that longer duration government bonds could benefit in such an environment. “As liquidity improves globally and domestic inflation trends stay benign, long-end bonds look increasingly attractive,” Vishal Goenka said.

Overall, banking analysts believe the Fed’s pivot gives the RBI additional flexibility, but not a compulsion to ease policy. The central bank’s primary challenge will be to balance the external environment with domestic realities, and ensuring that inflation expectations remain anchored amid hopes of growth momentum.

With India’s growth showing signs of broad-based recovery and inflation projected to stay below the 4 percent mark, economists expect the December policy review to be a finely balanced one. Whether the RBI opts for a symbolic rate cut or extends the pause, the decision will ultimately hinge on India’s economic recovery and the stability of external environment.