The Fed's decision will not only have a direct impact on global investors moving into emerging markets, including India, but more importantly, is likely to act as a trigger for other central banks to consider following suit with their own rate cuts.

"From 'Inflation is transitory' to 'higher rates for longer', the Fed has come a long way to meet market expectations. This rate cut will facilitate flows to the emerging market assets with weaker dollar and lower rates," Nilesh Shah, Managing Director, Kotak Mahindra AMC said.

The Fed’s decision is set to weaken the US dollar and push the Indian rupee up.

While this may lead to further easing of inflation as imports will become cheaper, it will also hit the country’s exporters as their goods will become costlier in global markets.

The Indian rupee is currently pegged at Rs 83.8 to a US dollar.  

Will RBI Follow Suit With Its Own Rate Cut?

Though market expectations are high that Reserve Bank of India (RBI) will align its move with the Fed's decision, sources told The Secretariat that Mint Street is expected to do its own analysis of the macroeconomic dynamics rather than simply align with the US Fed’s move.

“The RBI is expected to weigh pros and cons independently even as inflationary pressures have eased,” a senior finance ministry official said, adding that the decision in fact could make the situation complex for the central bank.

RBI Governor Shaktikanta Das earlier said that the central bank will look at long-term inflation projections rather than monthly data before taking any decision on interest rates.

Das also said that financial stability will also drive RBI's decision.

India’s annual inflation rate measured on consumer price index (CPI) rose to 3.65 per cent in August from 3.6 per cent in July -- the second lowest in the last five years and well below the RBI's target of 4 per cent.

According to data released by the Ministry of Statistics and Programme Implementation (MoSPI), corresponding inflation rates for rural and urban areas stood at 4.16 per cent and 3.14 per cent respectively. 

Inflation Down; Food, Fuel Prices Still High

Notwithstanding the overall inflation numbers, food prices have remained stubbornly high so far, something that has been worrying the Indian policymakers.

Food inflation, based on the Consumer Food Price Index (CFPI) increased to 5.66 per cent in August.

The data which was provisionally released by MoSPI revealed that the corresponding inflation rate for rural and urban areas was recorded at 6.02 per cent and 4.99 per cent respectively.

Not just that. Fuel prices in the country have also remained high despite a drop in global oil prices.

International brent crude prices are currently at around US$ 73 per barrel after breaching the US$ 100 to a barrel level in February 2022.

However, retail prices of petrol and diesel in India continued to remain at elevated levels. In Delhi, the price is Rs 94.72 a litre while in Mumbai it is Rs 103.44. In other cities such as Ahmedabad and Bengaluru, it is Rs 94.5 a litre and Rs 102.86 a litre respectively.

As a consequence last week, Petroleum Secretary Pankaj Jain indicated that the oil marketing companies could consider a cut in prices and that the issue was discussed both by the petroleum and finance ministries. However, no decision has been taken yet.

After the Fed, the focus will now shift to the RBI, which is slated to have a meeting of the six-member Monetary Policy Committee (MPC) next month.

India’s Slowing Growth Rate Story

A slowing economic growth—6.7 per cent in the April to June quarter this year as against 8.2 per cent in the corresponding period in 2023-24—has led to rising concerns among the country’s policymakers.

Despite a rise in chorus for a policy rate cut to spur lending and growth, RBI has kept the Repo, or the overnight lending rate to banks, steady at 6.5 per cent. Even RBI MPC members have given diverging opinions on the policy rate issue.

However, with the clamour for a cut in policy rates getting louder over the last few months and being topped up by the US Fed's decision, the heat will now be on India's monetary policy makers.

The big story to watch out for is—will the RBI finally reduce policy rates in October just ahead of the festive season?