America’s central bank lowered its policy rate by a quarter point on September 17. The decision was made in Washington, but its effects travel to Indian markets, the rupee and, eventually, the RBI.
On September 17, the US Federal Reserve cut its benchmark rate by 0.25 percentage points, to a range of 4.00% to 4.25%. It was the Fed’s first cut of the year, made because the American job market had started to soften. Indian markets reacted within minutes. To understand why, it helps to think of global money as water looking for the highest ground.
Money goes where the return is
A large investment fund in New York can park money in US government bonds and earn whatever the Fed’s rates imply, with almost no risk. Or it can buy Indian bonds and shares, which offer higher returns but carry currency risk and more volatility. When US interest rates fall, the safe American option pays less, and the higher Indian return looks more attractive by comparison. Some of that money moves. Economists call these flows foreign portfolio investment.
From flows to the rupee
Foreign money has to be converted into rupees before it can buy anything in India, so more inflows mean more demand for rupees. That tends to steady or strengthen the exchange rate. A firmer rupee in turn makes imports such as oil a little cheaper, which helps keep inflation in check.
The Fed sets the price of the world’s safest money. Every other country’s money is priced against it.
Room for the RBI
The most important effect is the least visible. If the RBI cuts its repo rate while the Fed holds high, the gap between Indian and American rates narrows, foreign money can leave and the rupee can fall sharply. When the Fed is cutting too, the RBI can move with less fear of that outcome. So a decision taken in Washington this week quietly widens the options for Mumbai at its next meeting, and that is how it eventually reaches the EMI on a loan in Indore.
Sources: Federal Reserve FOMC statement, September 17, 2025.
- The Fed cut its policy rate to 4.00%–4.25%, its first cut of 2025.
- Lower US rates make Indian assets relatively more attractive to global investors.
- More foreign money flowing in tends to support the rupee and Indian shares.
- A Fed cut also gives the RBI more room to keep its own rates low.
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