Athira Sethu
Kochi, 17 Sep 2025
Following its nine-month standstill, the US Federal Reserve will announce its first rate cut in a long time. Markets are convinced there is almost a 100% probability the Fed will reduce rates by 0.25% on September 17 when they come to a decision.
The economy has begun to weaken: in August, the US created just 22,000 jobs, the lowest gain since the pandemic recovery started, and unemployment rose to its highest level in nearly four years. Job market fears increased as previous reports were marked down.
President Donald Trump has repeatedly demanded the Fed cut rates, but the central bank has been holding back, concerned that tariffs will damage growth as well as drive up prices.
Fed Chairman Jerome Powell admitted the situation is challenging, stating that inflation risks are elevated, while job growth risks are low, to present a difficult balancing act.
The investors primarily anticipate a minor 0.25% rate reduction. The CME’s FedWatch tool sees a 96% possibility of a cut of 0.25%, with an extremely low possibility of a bigger 0.50% reduction. The current target rate is between 4.25% and 4.5%.
Impact on Indian Markets
Indian markets will closely observe the Fed’s move. The rate reduction can assist in buttressing the upward movement of Indian stocks, which have been on the upswing for nine of the previous ten sessions.
Kranthi Bathini, an equity analyst, stated that Trump is putting pressure on the Fed to reduce rates, but the inflation concerns from tariffs would ensure that the reductions would be graduated. He feels the rate reduction would be beneficial for Indian banking and IT industries, freeing up the Reserve Bank of India to cut interest rates as well.
In general, Bathini feels that the Fed action would be a good sign for international markets, including Indian markets.
What About Foreign Investors?
The Fed’s signals for rate reductions in the future will be crucial for foreign investors. If the Fed provides a hawkish forecast, it might trigger a rally in US markets, which could be good news for emerging markets such as China and South Korea, writes global equities advisor Ankita Pathak. Alternatively, if the Fed indicates that it is not going to cut much more, it might trigger a sell-off in the US.
Foreign institutional investors (FIIs) have been offloading Indian shares over the past few months, with a net outflow of Rs 34,993 crore in August, partly on account of the current spate of trade tensions between India and the US. But Bathini believes that if there is an improvement in the tone of the US administration towards India, as recently Trump labeled India as a valued partner, it could reduce the outflow of foreign money. In addition to the rate cut, this can potentially slow down the sell-off in Indian stocks.
