The Fed’s Pivot: Charting the ripple effects on Indian markets

As the Federal Open Market Committee (FOMC) approaches its September 2025 meeting, the federal reserve is faced with multiple challenges. 

Now before we look into the effects of this pivot on the Indian markets, let’s recap what’s been happening in the US economy. 

Inflation remains sticky well above its 2% goal, the labour market is showing cracks with steep drop in job additions, and economic outlook is clouded by evolving trade tariffs. 

On top of all that, Fed’s credibility is put to test amid calls for aggressive rate cuts by the political leadership and questions about its independence. 

Job – Inflation Trade off

The total non-farm payroll additions, on three months average basis, fell from over 175,000 at start of the year to near 29,000 at August end (Source – US BLS). Furthermore, annual revisions to nonfarm payrolls data for the year prior to March 2025 showed a drop of 911,000 from the initial estimate. 

On the other hand, CPI inflation in the US has held above the Feds 2% goal since February 2021. Rising import tariffs and tax reductions under the One Big Beautifull Bill are anticipated to drive inflation even higher. 

At this point, the federal reserve seems more worried about weakening labour market than inflation. 

The Fed Chairman Jerome Powell, in his Jackson Hole speech characterised the labour market to be in a “curious kind of balance marked by slowing in both the supply of and demand for workers”. He cautioned that “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly,”

Fed Governor Christopher Waller had also shown concerns that “labour market condition could deteriorate further and quite rapidly, and I think it is important that the FOMC not wait until such a deterioration is under way and risk falling behind the curve in setting appropriate monetary policy.”(source – reuters)

Markets are betting on Fed to restart its rate cutting cycle. As of September 16, 2025, the CME Fedwatch tool shows 100% probability of at least a 25 basis points rate cut in this meeting with a small 5% probability of a larger 50 basis points cut. 

It’s also pricing for continuation or rate cuts in the October and December FOMC meeting as well with 68% probability of cumulative 75 basis points rate cut before the end of 2025. 

Although a rate cut in the September FOMC meeting seems given, future policy path looks more uncertain. The impact of tariff increases in yet to show up in the US inflation numbers. 

The average effective tariff rate on imports in the US has moved up from 2.4% at the start of the year to 17.4% (Source – The Yale Budget Lab). As per estimates by Goldman Sachs, US consumers are expected to bear approximately 67% of the cost of these tariffs by October 2025. 

Implications for Indian Markets

A change in U.S. policy can affect Indian markets through following channels: 

• Monetary-policy channel – While the RBI does not automatically align with the Fed’s actions, it does draw comfort from easier monetary policy in the US. Lowering interest rates in the US would provide the RBI greater flexibility to continue with the easy monetary policy. It can even open up room for additional rate cut.

• Expectation / risk-appetite channel – US rate cuts can boost investor sentiment and enhance risk appetite for emerging markets. Historically, Fed easing episodes have coincided with rally in the Indian debt markets. 

• Currency / capital-flows channel – Rate cuts in the US typically leads to depreciation pressure on the US Dollar and boost appeal for emerging market currencies and local debt. As India is included in the wider emerging market bond indices, it could now see a rise in foreign inflows in the domestic debt market with easing fed policy. 

Rate cuts in the US should drive Indian bond yields lower and strengthen the Indian Rupee. However, we anticipate its actual impact on the Indian markets to be minimal. Domestic monetary and fiscal policies would continue to have more significant impact on the domestic markets than US interest rates. 

We expect the RBI to remain in a ‘lower for longer’ rate setup and maintain an easy liquidity condition for an extended period. 

This presents a favourable backdrop for short to medium duration fixed income assets. For investors, the environment remains supportive of accrual -oriented fixed income strategies. 

Disclaimer: 

The views expressed are the author’s own views and not necessarily those of UTI Asset Management Company Limited.  

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