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    Can a 25 bps US Fed Rate Cut Stabilise the Indian Rupee?

    5 months ago

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    As the Indian rupee hovers near record lows, currency markets are closely watching the US Federal Reserve’s policy decision scheduled for Wednesday, December 10. Traders are hopeful that a 25-basis-point rate cut, along with a dovish message from Fed Chair Jerome Powell, could weaken the US dollar and offer relief to the Indian currency.

    The rupee strengthened by 17 paise to 89.88 against the US dollar on Tuesday, supported by a softer dollar and easing crude oil prices. The currency had slipped to an all-time low of 90.46 on December 4 due to uncertainty around the India–US trade agreement and persistent foreign outflows. Meanwhile, India and the United States are set to begin a three-day discussion on the first phase of their proposed bilateral trade deal starting December 10.

    Market Expects a 25 bps Cut

    Despite mixed economic data from the United States, markets have largely priced in a rate cut. According to the CME FedWatch Tool, traders assign an 89% probability to a 25-bps reduction.

    The Fed’s preferred inflation gauge, the PCE Price Index, rose 0.3% in both August and September, while annual inflation edged up to 2.8% in September. However, private payrolls recorded their sharpest decline in over two years at 32,000 in November, even as jobless claims fell to a three-year low.

    Comerica Bank’s Chief Economist Bill Adams expects the Federal Open Market Committee to trim the federal funds rate to the 3.50%–3.75% range. He noted that the Fed is unlikely to offer clear guidance for 2026 due to disagreements among committee members and may focus instead on supporting short-term funding markets.

    Impact on the Rupee

    Analysts say the rate cut could boost sentiment in Indian equities and reduce pressure on the rupee by narrowing the interest rate gap between the US and emerging markets. Lower US rates typically improve global risk appetite and encourage foreign inflows.

    However, many experts believe the cut is already fully priced in, meaning the actual impact on the rupee may be limited. They emphasize that the Fed’s forward guidance will be more crucial than the rate cut itself.

    Ajit Mishra of Religare Broking said the rupee may not see significant movement, as any support from a softer dollar could be offset by commodity prices and domestic macroeconomic conditions. He added that equity markets usually respond positively to higher global liquidity, but long-term flows will depend on the Fed’s tone.

    Anindya Banerjee of Kotak Securities said the USD–INR pair is likely to trade in the 89.50–91.00 range in the near term. A dovish Fed stance could push the rupee toward 89.50, while a hawkish message may weaken risk sentiment and move the rupee closer to 91.00.

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